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Tickers in this Article: OEF, XLG, MGC, IWM, DIA, MO, TUP
An interesting divergence is happening within the markets these days. Recently, large-cap companies have been outperforming their smaller-cap sisters. During the period from the markets bottom on March 9, 2009 through October 14, iShares Russell 2000 Index (NYSE: IWM), the broad measure of the small-cap sector has rallied nearly 82%, besting the Dow Jones Industrials (NYSE: DIA) gain of 52%. However, since October 14, the numbers are painting a different story. The Russell is down an average 3%, while the Mega Cap Dow was up 6%.

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The Switch
During this year-long rally, high-quality large-cap stocks have been left behind. Simply, at a straight valuation point, mega-cap stocks are trading at much cheaper levels than small stocks. Monster cap cigarette-maker Altria (NYSE: MO) is trading at a low price-to-earnings ratio of 12 versus small-cap Tupperware Brands (NYSE: TUP) P/E of 20. Institutional investors have been taking profits on "expensive" companies and plowing those gains in relatively inexpensive securities, in this case large caps.

The falling dollar is also contributing to this trend. Investors have been flocking to multinational corporations that profit from overseas sales. A weaker dollar provides companies selling overseas a cheaper product in local currencies. This also pads their own books when strong currency revenue is converted back into dollars. Larger companies tend to have more of their overall revenue derived from international markets versus smaller domestic firms.

Mega-Cap Advantages
Analyzing overall portfolio risk is having an effect on the shift from small to large. Overall, large multinationals tend to have stable revenue streams and much stronger balance sheets. This increased interest from institutional investors could signal an uncertainty about the economy in the upcoming months. Blue chips are better equipped to handle the downturns. Their bulk offers advantages in a slowing and uncertain economy. These include their heavier dividends and the ability to acquire floundering smaller competitors.


Adding the Big Boys to a Portfolio
While most investors have exposure in their portfolios to the broad large-cap indexes such as the S&P 500, taking a hedged bet on the largest of the large may make sense as there continues to be uncertainty regarding the health of the economy. There are several ETFs that focus on the upper tier of market capitalization, including the previously mentioned Dow Diamonds (NYSE: DIA). Below are three picks with increasing levels on holdings concentrations.

The Vanguard Mega Cap (NYSE: MGC) contains 300 of the largest companies in the United States. In keeping up with Vanguard tradition, the fund sports a rock bottom expense ratio of 0.13%. The fund touts Microsoft (NASDAQ: MSFT) and Procter and Gamble (NYSE: PG) as top holdings.

Yale University favorite and oldest mega cap ETF, iShares S&P 100 Index (NYSE: OEF) focuses its attention on the top 100 stocks within the broad S&P 500. The S&P 100 charges 0.20% in fees.

For investors wanting a more concentrated bet on the mega-cap sector, the Rydex Russell Top 50 (NYSE: XLG) slims down to just 50 of the largest U.S. companies. Generally speaking, ETFs with less stock holdings will be more volatile on both the upside and downside. The Russell Top 50 might be a better mega-cap hedge due to its smaller focus. The fund charges 0.20% in expenses. (Learn more about using ETFs or Index Funds in ETFs Vs Index Funds: Quantifying The Differences.

Bottom Line
In recent weeks the market has gone through an interesting shift. Small-cap stocks seem to be losing favor to their larger counterparts. This could signal investor sentiment on the economy in general. By adding a mega-cap hedge to a portfolio, investors can gain some risk control if things go sour. The previous exchange traded funds offer an easy way to focus on the biggest of the big.

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