The rally was sparked off by a flurry of solid economic data, better-than-expected second-quarter earnings, increased M&A activities, improving business conditions, renewed optimism in housing recovery and robust job growth. Further, the recent consumer sentiment survey has been extremely positive with the monthly Consumer Confidence Index, measured by the Conference Board, climbing to the highest level in seven years to 92.4 in August from the revised 90.3 in July.
Total earnings for the 480 S&P 500 members that have reported Q2 results are up 8.1% on 4.4% higher revenues with 65.6% beating EPS estimates and 61% coming out with positive revenue surprises. This performance is much better than many recent quarters. The pace of negative revisions for the upcoming quarters has eased considerably in comparison to the prior quarters of the past two years when steep downward revisions were frequent.
All positive sentiments are expected to propel stock markets higher in the coming months. However, investors are still cautious about the timing of the interest rates hike, ongoing violence in Israel, and the political impasse between Russia and Ukraine. As such, investors should focus on large cap stocks, which tend to be the most stable in an adverse economic scenario while at the same time offer capital appreciation in a booming market. Further, honing in on pure growth securities in this capitalization level ensures higher returns.
Although lofty valuation concerns persist for the growth stocks, investors should note that large cap growth stocks held steady in the meltdown seen earlier in the year. As a result, the combination of large cap and growth stocks provide nice capital appreciation opportunity on improving economic conditions. Further, these tend to outperform during an uptrend, though these are more volatile than the value counterparts (see: all Large Cap ETFs here).
Given this, investors may want to consider cycling into the large cap growth space in order to obtain a nice momentum play. While looking at individual companies is certainly an option, a focus on top ranked large cap growth ETFs could be a less risky way to tap into the same broad trends.
Top Ranked Large Cap Growth ETF in Focus
We have found a number of ETFs that have the top Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy) in the large cap growth space and are thus expected to outperform in the months to come.
While all these top ranked ETFs are likely to outperform, the following three funds could be good choices to tap into the space. This trio has enjoyed a strong momentum and is leading the broad market and value funds by mid margins from the year-to-date look. This is because it has potentially superior weighting methodologies which could allow it to continue leading the large cap growth space in the coming months.
PowerShares Fundamental Pure Large Growth Portfolio (PXLG)
This ETF follows the RAFI Fundamental Large Growth Index and holds 51 stocks in its basket. The product has amassed $118.9 million in its asset base and sees light volume of over 6,000 shares per day. It charges 39 bps in fees per year from investors. The fund is largely concentrated on the top three holdings – Microsoft (MSFT), Apple (AAPL) Wells Fargo (WFC) – which collectively make up for 25% of the portfolio.
Information technology firms dominate the fund’s return at 35.5% while healthcare, energy, financials, and consumer discretionary also get double-digit exposure. The ETF gained 13.6% in the year-to-date time frame compared to a gain of 7.1% for its value counterpart (PXLV). The fund has a Zacks Rank of 2 with a Medium risk outlook (read: 3 Excellent Value ETFs Poised to Outperform).
Guggenheim S&P 500 Pure Growth ETF (RPG)
This ETF tracks the S&P 500 Pure Growth Index, holding 111 securities in its basket. The fund is widely diversified across various securities as none of these holds more than 2.15% of total assets in the basket. However, the product has a slight tilt toward the consumer discretionary sector accounting for over 28% share while healthcare, information technology and financials round off the next three spots.
RPG is one of the popular and liquid choices in the large cap growth space with AUM of $1.7 billion and average daily volume of more than 177,000 shares. Expense ratio came in at 0.35%. The fund is up 14% so far this year, much higher than the returns of 10.3% for the pure value ETF (RPV). The ETF has a Zacks Rank of 1 with Medium risk outlook.
iShares Morningstar Large-Cap Growth ETF (JKE)
With AUM of $558.9 million, this product tracks the Morningstar Large Growth Index. Holding 113 securities, the fund is largely concentrated on the top firm – AAPL – at 11.15% while other firms do not make up for more than 3.05% share. From a sector look, technology and consumer services take the top two spots with a combined 48.6% of the portfolio.
The ETF charges 25 bps in annual fees and trades in light volume of nearly 19,000 shares a day. JKE returned 11.7% in the same period while its value counterpart (JKF) is up 8.7%. The ETF has a Zacks Rank of 1 with Medium risk outlook.
This article is brought to you courtesy of Sweta Killa from Zacks.