After a strong start to 2019, many investors are looking for segments of the market that could protect capital from a significant pullback. While some are choosing to reduce their exposure to equities, others may want to consider a position in some of the largest companies as a way to mitigate the impact of a sell-off. In the paragraphs below, we'll take a look at several exchange-traded products to determine how active traders will be looking to position themselves over the weeks or months ahead.
Invesco S&P 500 Top 50 ETF (XLG)
As you may know, the S&P 500 Index comprises the 500 leading companies from across the United States and represents approximately 80% coverage of available market capitalization. It is widely regarded as one of the best gauges for large-cap U.S. equities and is often added to portfolios of investors seeking exposure to the U.S. While many investors want broad exposure to the entire U.S. stock market, some prefer to buy into a subset of the top 50 companies for the purposes of gaining exposure to limit downside risk and in many cases generate consistent and attractive dividend yields.
One common exchange-traded product for buying into this niche segment of mega caps is the Invesco S&P 500 Top 50 ETF (XLG). Fundamentally, the holdings carry an average market cap of nearly $356 billion, and the fund has a total expense ratio of 0.2%. Taking a look at the chart, you can see that the surge in momentum so far in 2019 has pushed the price of the fund above the resistance of its 200-day moving average (red line). The rise in price is now also in the process of testing the resistance of a horizontal trendline, which active traders will likely be keeping a close eye on. A close above the dotted resistance will likely act as a catalyst for a move back toward the 2018 high of $211.83.
Vanguard Mega Cap ETF (MGC)
Another ETF that offers exposure to mega-cap companies that investors may want to consider is the Vanguard Mega Cap ETF (MGC). Fundamentally, the fund comprises 262 holdings with a median market cap of $127 billion. With total net assets of $1.7 billion, MGC is one of the most popular ETFs in this segment, and as you can see from the chart below, the pattern looks nearly identical to the one for XLG shown above. Active traders will likely keep a close eye on the dotted trendline for determining the placement of any buy-stop orders. From a risk management perspective, stop losses will most likely be placed below the 200-day moving average at $94.27 in case of a sudden pullback.
Vanguard Mega Cap Value ETF (MGV)
Another related mega-cap ETF that could be worth consideration over the weeks ahead is the Vanguard Mega Cap Value ETF (MGV). For investors seeking exposure to the world's largest companies with a value investing lens, MGV is an interesting choice because it briefly rose above the dotted resistance of an influential trendline. The nearby support of the 200-day moving average will likely be used to determine the placement of stop-loss orders, and traders will likely set their targets near the high of $82.02.
The Bottom Line
As investors start to take a closer look at their portfolio allocation, it could prove prudent for many to shift some capital into the market's largest companies. Based on the charts above, traders will likely keep an eye on the nearby resistance of influential trendlines. Breaks above these levels could be the catalyst needed for a sharp rise back toward the 2018 highs and beyond.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.