To Mega Caps or Ex Mega Caps: is that the question?
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Key takeaways
• The rise of Mega Cap stocks1 has fundamentally reshaped the US equity market. These giants offer significant growth potential but also come with concentration risks that investors must carefully manage.
• By strategically allocating investments between the MSCI USA Mega Cap Select Index and the MSCI USA Ex Mega Cap Select Index, investors can balance the benefits of exposure to market leaders with the diversification2 needed to mitigate risk.
• Ultimately, the allocation of your US equity exposure should align with your unique goals, risk tolerance, and market outlook. Each investor must define their strategy based on their convictions, ensuring it reflects their priorities and adapts to the evolving equity landscape.
1. The phenomenal rise of Mega Cap stocks
Over the past decade, Mega Cap stocks have delivered extraordinary growth3. Companies like Apple, which surpassed a $3 trillion market valuation in 20244, and tech leaders Microsoft and Alphabet have consistently driven market returns through innovation and strong earnings performance5.
The numbers speak for themselves: over the past five years, the MSCI USA Mega Cap Select Index delivered an impressive annualised performance of 18%, far outpacing the broader MSCI USA Index at 15%6. This remarkable performance has solidified the dominance of Mega Caps in the market, but it also has significant implications for investors.
Source: MSCI, Gross Profitability is calculated as (Sales – Cost of Goods Sold)/Total Assets. Please refer to MSCI Fundamental Data Methodology Book, June 2024.
Source: Amundi, MSCI, Data as at 30/09/2024. Past performance is not a reliable indicator of future performance.
The risks behind the success
Mega-cap stocks, while undeniably successful, can pose risks to investors due to their outsized influence on market-cap-weighted indices. These indices have become increasingly concentrated in a few dominant companies. The MSCI USA Mega Cap Select Index, for example, trades at an average price-to-earnings (P/E) ratio of 32x, compared to 23.6x for the broader market, as measured by the MSCI USA Index6.
While these high valuation levels reflect strong growth prospects and investor confidence, they also make these stocks more vulnerable to market corrections.
2. The case for Mega Cap exposure
Mega Caps can of course play a critical role in a well-balanced portfolio:
- Market leadership: These companies are often leaders in innovation and hold dominant positions in sectors like technology, healthcare, and e-commerce.
- Resilience: Mega Caps generally have strong balance sheets and are often better positioned to withstand economic downturns.
- Megatrends: Investing in Mega Caps allows investors to benefit from ongoing trends such as digitalisation, artificial intelligence, and renewable energy.
Diversifying2 beyond Mega Caps
However, as discussed, while Mega Caps offer significant opportunities, they also introduce concentration risks. With this in mind, allocating to the MSCI USA Ex Mega Cap Index can provide diversification2 benefits by spreading exposure across mid-cap and smaller large-cap companies. These companies have often delivered higher performance during specific market cycles, driven by their agility and greater exposure to growth opportunities3.
For example, in 2023, the MSCI World ex USA Index—which excludes US Mega Cap stocks—posted a strong performance of 18.60%7, underscoring the potential merits of diversifying2 beyond Mega Caps to capture growth in other segments of the market3.
Diversifying2 beyond Mega Caps can:
- Mitigate sector-specific risks (e.g., technology overexposure).
- Reduce volatility by spreading investments across different market capitalisations and sectors.
- Provide access to the higher growth potential found in smaller, more agile companies.
A look at non-Mega Cap valuations
Non-Mega Cap stocks often trade at more attractive valuations, offering compelling opportunities for investors3.
These lower valuations could provide a margin of safety by reducing the risk of overpaying for future earnings and limiting downside potential in volatile markets, while offering better upside potential, as valuations revert to historical averages.
To Mega Caps or Ex Mega Caps?
The debate between concentration and diversification2 lies at the heart of investment strategy. When it comes to Mega Cap and non-Mega Cap stocks, the decision ultimately hinges on each investor’s unique priorities and approach.
Mega Cap stocks may continue to lead in innovation and market influence, while smaller-cap companies can offer distinct opportunities for diversification and growth2. The right choice depends on your individual goals, risk tolerance, and outlook for the market.
Each investor must craft their allocation strategy thoughtfully, aligning it with their convictions and adapting it to the evolving equity landscape.
3. Accessing the opportunity
ETFs can provide simple and cost-effective access to US equities.
The Amundi MSCI USA Mega Cap UCITS ETF offers exposure to the largest securities with a market capitalization above $200 Bn within the MSCI USA Index (currently 37 stocks including the so-called “Magnificent 7”)8. It is suitable for investors seeking growth potential from US Mega Cap stocks3.
The Amundi MSCI USA Ex Mega Cap UCITS ETF offers exposure to the broader MSCI USA index while excluding the constituents of the MSCI USA Mega Cap Select Index8. This allows investors to diversify their US exposure and reduce correlation with the performance of the US Mega Cap stocks9.
1.Mega Cap stocks are defined as companies with market capitalisations in excess of $200 billion.
2.Diversification does not guarantee a profit or protect against a loss.
3.Past market trends are not a reliable indicator of future ones.
4.https://www.forbes.com/sites/dereksaul/2024/10/15/apple-stock-rises-to-all-time-high-and-record-36-trillion-market-cap/
5.Past performance is not a reliable indicator of future performance.
6.Source: Bloomberg, MSCI, Amundi, Data as at 31/10/2024. Past performance is not indicative of future returns.
7.Source: MSCI World ex USA Index factsheet as at 31/12/2023.
8.As of 27/11/2024. For more details regarding the investment objective of the fund, please refer to the Key Information (KID) and the prospectus. For more information regarding the index methodology, please refer to msci.com.
9.Diversification does not guarantee a profit or protect against a loss. Please note that the fund does not offer any capital or performance guarantee.
Investment involves risks. For more information, please refer to the Risk section below.
KNOWING YOUR RISK
It is important for potential investors to evaluate the risks described below and in the fund’s Key Information Document (“KID”) and prospectus available on our website www.amundietf.com.
CAPITAL AT RISK - ETFs are tracking instruments. Their risk profile is similar to a direct investment in the underlying index. Investors’ capital is fully at risk and investors may not get back the amount originally invested.
UNDERLYING RISK - The underlying index of an ETF may be complex and volatile. For example, ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.
REPLICATION RISK - The fund’s objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.
COUNTERPARTY RISK - Investors are exposed to risks resulting from the use of an OTC swap (over-the-counter) or securities lending with the respective counterparty(-ies). Counterparty(-ies) are credit institution(s) whose name(s) can be found on the fund’s website amundietf.com. In line with the UCITS guidelines, the exposure to the counterparty cannot exceed 10% of the total assets of the fund.
CURRENCY RISK – An ETF may be exposed to currency risk if the ETF is denominated in a currency different to that of the underlying index securities it is tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.
LIQUIDITY RISK – There is a risk associated with the markets to which the ETF is exposed. The price and the value of investments are linked to the liquidity risk of the underlying index components. Investments can go up or down. In addition, on the secondary market liquidity is provided by registered market makers on the respective stock exchange where the ETF is listed. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.
VOLATILITY RISK – The ETF is exposed to changes in the volatility patterns of the underlying index relevant markets. The ETF value can change rapidly and unpredictably, and potentially move in a large magnitude, up or down.
CONCENTRATION RISK – Thematic ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive, it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.
CREDIT WORTHINESS – The investors are exposed to the creditworthiness of the Issuer.
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