Designed to provide broad exposure to the Style Box - Large Cap Blend category of the market, the Principal U.S. MegaCap ETF (USMC) is a smart beta exchange traded fund launched on 10/12/2017.
What Are Smart Beta ETFs?
The ETF industry has traditionally been dominated by products based on market capitalization weighted indexes that are designed to represent the market or a particular segment of the market.
Market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns, and are a good option for investors who believe in market efficiency.
But, there are some investors who would rather invest in smart beta funds; these funds track non-cap weighted strategies, and are a strong option for those who prefer choosing great stocks in order to beat the market.
By attempting to pick stocks that have a better chance of risk-return performance, non-cap weighted indexes are based on certain fundamental characteristics, or a combination of such.
Methodologies like equal-weighting, one of the simplest options out there, fundamental weighting, and volatility/momentum based weighting are all choices offered to investors in this space, but not all of them can deliver superior returns.
Fund Sponsor & Index
The fund is managed by Principal Funds, and has been able to amass over $1.96 billion, which makes it one of the larger ETFs in the Style Box - Large Cap Blend. USMC, before fees and expenses, seeks to match the performance of the Nasdaq US Mega Cap Select Leaders Index.
The Nasdaq U.S. Mega Cap Select Leaders Index uses a quantitative model designed to identify equity securities of companies with the largest market capitalizations in the Nasdaq US 500 Large Cap Index, with higher weights given to securities that are less volatile.
Cost & Other Expenses
Cost is an important factor in selecting the right ETF, and cheaper funds can significantly outperform their more expensive cousins if all other fundamentals are the same.
Annual operating expenses for this ETF are 0.12%, making it one of the least expensive products in the space.
The fund has a 12-month trailing dividend yield of 1.42%.
Sector Exposure and Top Holdings
Even though ETFs offer diversified exposure which minimizes single stock risk, it is still important to look into a fund's holdings before investing. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.
This ETF has heaviest allocation in the Information Technology sector - about 31.30% of the portfolio. Healthcare and Telecom round out the top three.
Looking at individual holdings, Apple Inc (NASDAQ:AAPL) Common Stock Usd.00001 (AAPL) accounts for about 5.91% of total assets, followed by Pfizer Inc Common Stock Usd.05 (PFE) and Pepsico Inc (NASDAQ:PEP) Common Stock Usd.017 (PEP).
Its top 10 holdings account for approximately 32.82% of USMC's total assets under management.
Performance and Risk
Year-to-date, the Principal U.S. MegaCap ETF has added roughly 23.03% so far, and is up about 24.37% over the last 12 months (as of 12/08/2021). USMC has traded between $34.82 and $43.39 in this past 52-week period.
USMC has a beta of 0.90 and standard deviation of 21.08% for the trailing three-year period. With about 47 holdings, it has more concentrated exposure than peers.
Alternatives
Principal U.S. MegaCap ETF is a reasonable option for investors seeking to outperform the Style Box - Large Cap Blend segment of the market. However, there are other ETFs in the space which investors could consider.
IShares Core S&P 500 ETF (IVV) tracks S&P 500 Index and the SPDR S&P 500 ETF (SPY) tracks S&P 500 Index. IShares Core S&P 500 ETF has $329.66 billion in assets, SPDR S&P 500 ETF has $428.70 billion. IVV has an expense ratio of 0.03% and SPY charges 0.09%.
Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Style Box - Large Cap Blend.
Bottom Line
To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.
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Principal U.S. MegaCap ETF (USMC): ETF Research Reports
Apple Inc. (AAPL): Free Stock Analysis Report
Pfizer Inc. (NYSE:PFE): Free Stock Analysis Report
PepsiCo, Inc. (PEP): Free Stock Analysis Report
SPDR S&P 500 ETF (SPY): ETF Research Reports
iShares Core S&P 500 ETF (IVV): ETF Research Reports
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