Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some huge companies to your portfolio for ballast, and would like to focus on those that seem relatively undervalued, the Vanguard Mega Cap 300 Value Index ETF (NYSE: MGV) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in a lot of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Vanguard ETF's expense ratio -- its annual fee -- is a very low 0.12%. (Vanguard is known for low fees.) The fund is somewhat small, too, so if you're thinking of buying, beware of a possibly large spread between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has not been the best performer in its relatively short life, underperforming the world market. But it's the future that counts, more than the past. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 24%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Plenty of megacap companies had strong performances over the past year. Tobacco giant Altria (NYSE: MO), for example, surged 38%, recently hitting a 52-week high. Despite the surge, the stock still offers a dividend yield near 5%. Many like it for the sturdiness of its business -- after all, its customers are literally addicted to it. But there are worrisome trends, such as rising regulations and taxes, a shrinking smoking base in the U.S., and competition from discount cigarettes. Altria has many billions in debt, too, and has been laying off workers.
Abbott Labs (NYSE: ABT) gained 26%, as it prepares to split up its pharmaceutical business from the rest of the company at the end of the year. Its non-pharma entity will be focusing on high-potential emerging markets, such as by tailoring nutritional supplements for local regions in India. Its pharma unit, meanwhile, has pleased investors recently with promising early results of tests on a drug for Parkinson's disease. It has been a feel-good company, too, cited for its corporate generosity.
General Electric (NYSE: GE) advanced 13%, and has been buoyed by news that its GE Capital division has turned around enough to resume making dividend payments to its parent company. GE Capital will also be collecting $2.5 billion as it sells a commercial property lender to EverBank, in its effort to shrink its real-estate operations. GE has also been investing in boosting its energy-infrastructure business, and began 2012 with a record order backlog of more than $200 billion.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Bank of America (NYSE: BAC), for example, sank 26%, lagging its peers in recovering from the mortgage foreclosure debacle. Adding insult to injury, its 2008 acquisition of Countrywide is now being referred to by some experts as the worst deal ever made in the history of banking, costing $40 billion instead of the expected $4 billion. It's not all bad news, though. For example, Bank of America may benefit to the tune of several hundred million dollars at the expense of JPMorgan Chase's recent derivative disaster.
The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
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