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Financial Literacy

What is a Large Cap Fund?

So much of the stock market revolves around the movements of its largest companies. These so-called large cap stocks account for a significant portion of the total market capitalization of the stock market as a whole. As such, they’re staples in any portfolio or managed fund. There are also large cap funds that focus almost exclusively on these companies and the benefits that come with them. 

These funds offer a lot of appeal for investors. Not just because they’re comprised of the big-name companies most people are familiar with. But beyond name recognition, they offer a plethora of other benefits. And these benefits make them popular among everyone from dividend-focused investors to the risk averse. 

Here’s a closer look at the mechanics of them, as well as their pros and cons as investment vehicles and what investors should know about them. 

Large cap funds offer a lot of appeal to investors.

A Quick Recap of Market Capitalization

To understand the fundamental nature of a large cap fund, it’s important to contextualize market capitalization. For those who need a quick refresher, here’s a breakdown of how companies shake out based on their market capitalization:

    • Nano cap: <$50 million
    • Micro caps: $50 million to $300 million
    • Small caps: $300 million to $2 billion
    • Mid caps: $2 billion to $10 billion
  • Large caps: $10 billion to $200 billion
  • Mega caps: >$200 billion

There’s really no distinction between large and mega cap companies. They include a mixture of both, typically anchored by a few mega caps. It depends on the fund’s allocation and investment focus. 

A Focus on Large Cap Companies

The focus of these funds is obviously anchored by large cap companies. However, there are many different types of funds to choose from, with differing investment theses, compositions and allocations. 

  • Large cap growth funds such as the Vanguard Growth Index Fund (VIGAX) invest in large cap companies in high-growth sectors such as consumer goods and IT. These funds have moderately higher risk due to sector, yet great stability thanks to the established nature of their large cap holdings. 
  • Large cap emerging market funds such as the iShares MSCI Emerging Markets ETF (EEM) focus predominantly on large cap companies in global markets. These funds are high-risk, high-reward due to their globalized nature, and tend to be more diversified in their focus across different sectors. 
  • Large cap value funds like the Schwab US Large-Cap Value ETF (SCHV) seek to capitalize on large cap companies that investors may undervalue. These funds grow more slowly than other funds. But, they tend to appreciate with more certainty than funds containing over-valued holdings. 
  • Large cap dividend funds like the Invesco S&P Ultra Dividend Revenue ETF (RDIV) offer a collection of dividend-paying large caps. They’re ideal for passive income seekers. They usually have very low expense ratios and higher dividend payout. For example, RDIV pays out 4.78% annually in dividends. 

Between these categories and across “general” large cap funds, investors have no shortage of opportunities to expose themselves to strong, established companies through a portfolio of blue-chip bellwethers. 

Popular Large Cap Funds to Check Out

Interested in dipping your toes into a large cap investment fund? Here are a few of the most popular general ones and their expense ratios:

These funds (and many others) provide investors with exposure to the top 50, 100, 150 or 500 companies in the public markets. The result is access to tremendous profits, dividends, stability and performance. 

The Benefits of Large Cap Fund Investing

Stability is far and away the most important benefit of investing in a large cap fund. Because they’re comprised of “blue chip stocks,” they tend to see relative stability to the rest of the market. Even when broader indices drop, large cap funds may remain stable. This stability extends beyond their stock price, as well. We’re talking about companies that are entrenched market leaders, who aren’t at risk of disruption or contingencies that might force something like a dividend cut. 

Another major benefit is their low expense ratio. Because of their stability and reliability, there’s very little active management involved in these funds. Thus, they tend to have expense ratios at or below 0.10%. While some do trend higher, it’s uncommon, making large cap funds very affordable investments.

The Drawbacks of Large Cap Fund Investing

Large cap funds aren’t designed to beat the market in the near-term. At least, not significantly. The primary purpose of these funds is to pace the market and beat inflation. They’re primarily a way to preserve wealth. Depending on the type of fund, they may also be a good vehicle for passive income. Over time, large cap funds will beat the market. However, this generally happens on a timeline over decades. 

Large Cap Funds for a Worry-Free Portfolio

These funds aren’t going to set your portfolio on fire or bring you untold riches, at least, not overnight. They are buy-and-hold products that, against most odds, will appreciate steadily over time. And, even in times of economic turbulence, they’ll hold steady relative to the market or other individual blue-chip stocks. 

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If you’re looking for a set-it-and-forget-it investment with low fees that won’t eat into your total returns over time, large cap funds are ideal. They offer peace of mind and proven performance to investors who don’t have the time, patience or risk tolerance for anything but the highest echelon of companies.


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