New index to follow 50 biggest companies

NEW YORK -- A new index from the Russell Investment Group aims to help you track Wall Street's 800-pound gorillas.

The Russell Top 50 follows the performance of the 50 largest U.S. public companies, such as General Electric Co. and Exxon Mobil Corp. Cumulatively, they represent about 40 percent of the domestic equity market's total capitalization. Small investors can get a slice of this mega-cap pie through a new exchange-traded fund to be launched by Rydex Investments. It will trade on the American Stock Exchange under the ticker symbol XLG.

At a time when many analysts are predicting the start of a fresh era of large-cap outperformance, the introduction of a new mega-cap index should be appealing to investors, particularly amid a sharp drop in small-cap stocks after five years of strong returns.

"In the macroeconomic cycle we're in now, with interest rates rising, the economy is still moving along pretty well, cranking out 3 percent GDP [gross domestic product] growth," said Steve Sachs, director of trading at Rydex Investments in Rockville, Md. "But people are concerned about the effects of rising interest rates, rising inflation and the economy slowing down. We are getting into the later stages of the cycle, and that's were large-caps perform best."

Russell was motivated to create the index because managers of large-cap funds often take underweight positions in mega-caps as they seek to outperform the market, said Lori Richards, senior product manager for Russell Indexes. For small investors, an index that invests in the nation's largest publicly traded companies could provide a good counterpoint to an actively managed large-cap fund.

"If you're an active investor, you're taking more risk and trying to beat the market. Active managers find stocks they like and a lot of times they equally weight them," Richards said. "So if you're a large-cap manager, and you're equally weighting the stocks in your portfolio, you're underweighting, by default, these bigger stocks, because they are a huge part of the market."

Mega-cap stocks perform somewhat differently from the broader large-cap sector. For example, year-to-date, the Russell Top 50 is down 3.12 percent, while the Russell Top 200, which makes up 67 percent of the market, has lost 3.42 percent. Both of those have held up better than the Standard & Poor's 500, however, which has fallen 4.19 percent since the year began. And all three provide a stark contrast to the 10.3 percent swoon of the small-cap Russell 2000.

In addition to rounding out more diversified portfolios, the new index could hold appeal for novice investors. All of the stocks it holds are household names like GE, which accounts for 7.5 percent of the index, and Exxon Mobil, a close second at 7.3 percent. Others in the top 10 include Citigroup, Microsoft Corp., Pfizer Inc. and Johnson & Johnson. Those with the smallest market caps on the list include Qualcomm Inc., eBay Inc. and Kraft Foods Inc.

The nation's largest companies are usually known for being well-established, having stable business models and great cash flow, said Sachs, of Rydex. Companies like Microsoft and GE are the "text book definition of cash cows," he said, which helps them weather any part of the economic cycle. As an added bonus, he noted, the top 50 boast a collective yield of 2.6 percent.

"If you are one of those individuals who follows the Peter Lynch methodology, where you want to know the companies you're investing in, this is it," Sachs said, referring to the former Fidelity fund manager. "Just about everyone out there in the investing public would recognize these names. People are using these products every day."

Because the Russell Top 50 focuses just on companies with the largest market caps, it offers somewhat less diversity than a broader index, such as the Dow Jones industrial average. For example, the top 50 includes no companies in the materials and processing industry, or in producer durables.

The Dow differs from the Russell in that the 30 stocks it holds have been chosen by the editors of The Wall Street Journal since the turn of the century. This price-weighted index, which started out with just 11 holdings, has evolved into a widely used indicator of market conditions. Its stocks, commonly referred to as "blue chips," are chosen based on their position within their industries and their liquidity, among other factors. The Dow accounts for about 26 percent of the investable U.S. market.

There is some overlap between the Russell Top 50 and the Dow 30; 22 stocks can be found on both lists. The largest issue missing from the Dow is Bank of America Corp., the nation's eighth-largest company by market cap. Other large companies not found on the Dow include Cisco Systems Inc., ChevronTexaco Corp., Wells Fargo & Co., Pepsico Inc. and Dell Inc.

And there are eight stocks on the Dow that are not among the nation's 50 largest companies; Alcoa Inc., Boeing Co., Caterpillar Inc., DuPont de Nemours, General Motors Corp., Honeywell International Inc., McDonalds Corp. and United Technologies Corp.

Another factor to consider if you invest in the Top 50 is that it is highly concentrated in certain sectors. Financial services stocks make up 22 percent of its value; information technology stocks make up 17.8 percent, and health care stocks account for 16.8 percent. It is underweight in telecommunications, which makes up just 3.4 percent of its holdings.