Finding Blue Chip Stocks in ETFs

By Ron DeLegge, Editor

December 26, 2008

SAN DIEGO (ETFguide.com) - Has stock picking done more to help investors create wealth or destroy it? The swift collapse of stocks many people thought of as "blue chips" has to make you wonder.

Some of the best known stock pickers along with their amateur followers have demolished trillions of their own money. What's wrong with them?

Wasn't it CNBC's Jim Cramer who recommended Bear Stearns and Wachovia Corporation (NYSE: WB) just before they plummeted? And wasn't it Legg Mason's Bill Miller who kept buying Countrywide Financial and Freddie Mac (NYSE: FRE) just as they fell to unrecoverable depths? And what can be said of Wall Street's unapologetic equity analysts that didn't convert their buy ratings to sell ratings? After this much pain and suffering, you would think stock pickers would've learned their lesson. But they haven't.

Instead of coming to their senses like they should, many stock pickers have come to the wrong conclusions. What do unrecoverable losses from their dumb investments teach them? "We need to pick our stocks better."

What many investors have yet to learn is that they don't need to handpick individual stocks to make handsome profits. In fact many of America's best known companies have seen their stocks routinely outperformed by corresponding indexes and the exchange-traded funds (ETFs) following them.

A Reuters headline from November pointed out that more than 100 Blue Chip Stocks are now trading under $10 a share. Don't delude yourself into thinking you need to go on an investing spree, trying to buy each of these companies. The trading commissions would cost you a fortune not to mention the laborious task of trying to confirm you're buying the right companies.

As Warren Buffett has stated multiple times in his Berkshire Hathaway annual reports, most investors would be better off just buying a low cost index fund. Put another way, you can get your exposure to 100 plus blue chip stocks by just investing in an ETF that owns some of these very companies.  

Here's a few ETFs that will save you the trouble of sifting through the wreckage of broken blue chips. And, oh by the way, owning any one of these funds will get you exposure to some of the best run companies on the planet. You can also avoid the risk of owning individual stocks that has decimated so many investors.

Vanguard Mega Cap 300 (NYSEArca: MGC)

This fund contains 300 of the biggest large cap stocks in the U.S. It's index is weighted by market capitalization and some of the top holdings include Johnson & Johnson, Microsoft, and Procter & Gamble. The fund's annual expense ratio is just 0.13%, which means you get to keep most of the dividends and potential future growth instead of giving it to someone else.

Rydex Russell Top 50 (NYSEArca: XLG)

This fund is the more concentrated version of MGC because it contains exposure to just 50 super large stocks. Generally, funds with less stocks will be more volatile on both the upside and downside. Some of the top holdings in this ETF include Chevron, IBM, and JPMorgan Chase. The fund's annual expense ratio is 0.20%.

SPDRs S&P Dividend ETF (NYSEArca: SDY)

This fund has an annual yield just north of 5%, which is a lot better than the near zero percent yield on money market funds. You many not like SDY's top heavy exposure to the financial sector (41%), but that's where some of the best dividend payers are located. Top holdings are BB&T, KeyCorp, and U.S. Bancorp. The fund's annual expense ratio is 0.35%.

The January issue of ETFguide's Profit Strategy Newsletter highlighted other investment ideas to put your money on track for 2009. We also put together a short list of top dividend yielding ETFs that generate attractive income. See which funds they are by subscribing.   

Below is an excerpt from the ETF Profit Strategy Newsletter - Published on Oct.21, 2008

At the time, the Dow was above 9,000. It dropped below 7,500 and rallied into Nov./Dec