Today, large-cap stocks are in a favorable position as the stock market rally is broadening. Since the beginning of 2023, large-cap stocks have contributed an impressive 60 percent of the S&P 500's 40.5 percent return.
The Nasdaq 100 has also climbed 16 percent, largely due to the significant growth of mega-cap tech stocks. Unsurprisingly, the question of whether large-cap stocks are worth investing in or not rises.
In my opinion, investors may indeed take a closer look at them, and here are the reasons why.
Large-cap stocks VS medium and small-cap stocks
First of all, large-cap stocks are more trustworthy than medium—and small-cap stocks. Large-cap stocks are generally issued by mature, well-known companies with long track records of performance. They usually have a reputation for producing quality goods and services and a history of consistent dividend payments and steady growth. This means they are less volatile and risky than their medium—and small-cap rivals.
Secondly, the market has become very efficient. Due to that, it has become wiser not to find something more outstanding than the market trend but to replicate the best practices. From this point of view, it is evident that larger companies have much better practices because they rely on a larger amount of data, technologies, skills, artificial intelligence, and so on.
Any drawbacks behind?
Despite the number of benefits of large-cap stocks, investors might still face some threats. Beyond comparatively high volatility and dependence on market sentiment, large-cap stocks may entail other risks as well.
When we speak about large-cap stocks, we mainly refer to big tech companies like Nvidia, Microsoft, Apple, and others. Indeed, these companies' capitalization is peaking, especially due to rapid technology development such as AI. Nevertheless, investing in big tech may be potentially risky due to the potential AI bubble—investors are crowded in big tech.
The AI bubble suggests that the enthusiasm for AI could lead to significant volatility if the expected growth and advancements in AI do not materialize as quickly or as significantly as anticipated. Additionally, market saturation and other risks can significantly impact the stability of these investments.
Furthermore, the greater stability of large-cap stocks may also have a downside. The higher the risk associated with a stock, the greater the potential return generally. With large-cap stocks, investors might not experience the high returns that can come with stocks of different market caps.
Large-cap stocks also are not suitable for speculations. They’re better for realizing a buy-and-hold strategy. Investors should wait for them to rise in value.
Opportunities of large-cap ETFs
Despite these drawbacks, large-cap stocks provide an opportunity to invest in ETFs linked to them. Personally, I find large-cap ETFs more reliable because they operate based on a clearly defined algorithm. Unlike with classic stocks, investors know precisely what results to anticipate.
Investing in large-cap ETFs also allows investors to choose a field to invest in, minimizing risks, such as cocoa, gold, and other commodities ETFs. Currently, we see a growing trend where individuals prefer investing in broader commodities than specific companies. In this context, ETFs may present a good investment opportunity.
A tool for diversified investments
Summing up, I still do believe that the benefits of large-cap stocks outweigh the drawbacks. Large-cap stocks are a very important investing tool not only for individual investors but also for professional asset managers. Their stability, consistent performance, and established market presence make them a reliable component of any diversified investment portfolio.
While large-cap stocks may not offer the high returns associated with smaller-cap stocks, their reduced risk and dependable dividends provide a solid foundation for long-term investment strategies. However, like with any type of investment, large-cap stock buyers must remain alert and not forget about conducting a portfolio that mitigates potential risks.
Julia Khandoshko, CEO at the European broker Mind Money. Ms Khandoshko is a finance industry professional with 10 years of experience in technology and capital markets. Her familiarity with technology applications in financial services is underscored by 5 years of managing business development initiatives in the IT education sector. During this period, she collaborated closely with esteemed clients, such as Deutsche Bank, T-Systems, Luxoft, and JetBrains.
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