Thanks to historically reliable returns, financial advisors often recommend clients include allocations to funds with large-cap stocks.
Large-cap funds are generally defined as investing in companies with over $10 billion in market capitalization. These sorts of funds are generally seen as attractive because they are considered safer than small-cap funds.
Small-cap funds may be an attractive element of a diversified portfolio, but you wouldn't necessarily know that looking at the data from this year. The Russell 2000, the commonly used index to track small-cap stocks, has been up only 2.3% so far,
Over the past decade, large-cap funds have shown strong performance, often driven by the success of the "Magnificent 7" stocks, some of the world's largest companies benefiting from advances in AI. (These include Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.)
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Jon McCardle, president of
However, McCardle said, focusing on recent returns alone can lead to over-allocation in certain funds, compromising diversification and increasing portfolio risk.
"Funds frequently experience manager changes, style drift and higher turnover costs, all of which can impact performance," he said. "Recognizing these factors, we conduct regular manager reviews and assess other key aspects when selecting funds for clients."
While large-cap stocks tend to be more resilient, small- and mid-cap stocks often respond to market shifts earlier, said McCardle.
"In fragile economic conditions, we maintain a stronger focus on large-cap investments, reducing small-cap exposure," he said. "This balanced approach helps protect portfolios from the unintended consequences of overconcentration and ensures that risk is managed across market cycles."
The reason large-cap funds are seen as safer bets is the availability of a time-tested track record. Markets are generally efficient, but it's especially true in the large-cap space, said William Michael Lofley, a financial advisor with
"These are the largest, most analyzed, most traded companies in existence," he said.
If there is ever an asset class where you can make the case that the market has already priced things correctly, it's large-cap funds, said Loflet.
"Because of this, I lean passive when it comes to the asset class," he said. "Why pay a higher expense ratio for some active manager to purchase the same basket of stocks that everyone else is already purchasing?"
Scroll down the slideshow below for the 10 best-performing and 10 worst-performing large-cap equity open-end funds and ETFs domiciled in the U.S. over the past decade, based on their 10-year annualized total returns through the end of October.
Note: All data is from Morningstar Direct and is current as of Nov. 11, 2024.
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