Are you a growth or value investor? If you are unsure, you’re probably well suited to own one or two large-blend ETFs.
Some of the most popular types of large-blend ETFs are based on the S&P 500, Warren Buffett’s recommendation for most passive investors. A recent article from Morningstar.com pointed out that year-to-date through the end of August, large-blend ETFs were up 15.1%.
Large-cap stocks account for approximately 70% of the market capitalization of the entire U.S. market. If you’re looking for companies that will stand the test of time, these are the stocks that you should target.
Morningstar recommended four large-blend ETFs. Out of those, I selected one of them. In addition, you will discover two more that weren’t part of the article but fall into the large-blend category. These funds are from different ETF providers.
Invesco S&P 500 Quality ETF (SPHQ)
Invesco S&P 500 Quality ETF (NYSEARCA:SPHQ) is one of the four ETFs recommended by Morningstar. They liked it because it ranked in the 6th percentile over the past three years, delivering consistent, if not spectacular, returns.
The ETF tracks the performance of the S&P 500 Quality Index, a collection of stocks from the index that have high returns on equity, low leverage ratios, and low accruals ratios. Invesco defines low accrual ratios as “the change of the company’s net operating assets over the last year divided by the company’s average total assets over the last two years.”
It’s important to note that a high accrual ratio could indicate that a company isn’t collecting its accounts receivable quickly enough.
The index comprises the 100 stocks in the S&P 500 with the highest quality scores from the 503 available. The ETF currently has net assets of $6.0 billion. As I said, Morningstar likes it, giving it five stars.
Like all ETFs, the style tends to drift a little. In the case of SPHQ, even though it’s a large blend, just 38% of the assets are held in large-blend stocks. Mid-cap blends account for another 6%, with large-cap growth, large-cap value, mid-cap growth, and mid-cap value accounting for the rest.
The top 10 holdings account for 45% of SPHQ’s net assets. The top three sectors by weight are technology (31.2%), healthcare (18.1%), and energy (12.5%).
The expense ratio is just 0.15%. It’s the equivalent of paying $15 per $10,000 invested.
iShares S&P 100 ETF (OEF)
As the name suggests, the iShares S&P 100 ETF (NYSEARCA:OEF) tracks the performance of the S&P 100 Index, 100 large-cap stocks from the S&P 500. These are blue chip stocks with a minimum market cap of $12.7 billion. At present, that excludes approximately 69 stocks.
The S&P 100 is up 23.3% YTD which beats the S&P 500’s 17% year-to-date return. It has also beaten it over the past five years. While it’s a little more expensive at 0.20%, that’s not unreasonable given the extra performance.
No wonder Morningstar gives it five stars.
The top 10 holdings account for 45% of its $8.7 billion in net assets. The average market cap is $518 billion, with price-to-earnings and price-to-book ratios of 23.7x and 4.8x, respectively.
The three top sectors by weight are technology (32.9%), healthcare (12.4%), and communication services (12.2%).
Unless you feel that technology will suddenly fall out of favor with investors, OEF is a better play than SPHQ.
Dimensional U.S. Equity ETF (DFUS)
Dimensional U.S. Equity ETF (NYSEARCA:DFUS) is one of the many mutual funds that Dimensional converted to ETFs in June 2021. DFUS was one of the funds converted. It got its actual start in September 2001. DFUS currently has $6.9 billion in net assets.
DFUS is an actively managed ETF, yet it charges just 0.09%, making it appealing to investors interested in low-cost active management. Since 2013, it had just two years in negative territory — 18.4% in 2022 and 5.4% in 2018 — with an annualized total return of 12.0%.
I’ll take that every day and twice on Sunday.
Of the 11 sector weightings, technology is the highest (27.6%), while the lowest is real estate (0.2%). Sectors in double digits other than tech include financials (13.2%), healthcare (12.9%), consumer discretionary (11.2%), and industrials (10.0%).
The top 10 holdings account for 28% of the fund’s net assets. Considering it has 2,414 holdings, the top 10 represent the portfolio managers’ best ideas. I don’t think you can argue with its top 10.
Morningstar gives DFUS a four-star rating.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
