When it comes to broad stock market indexes like the S&P 500, many investors may not realize that a handful of large-cap companies hold a disproportionately large share of the index. This concentration is the result of the methodology behind market-capitalization weighting.
In a market-capitalization-weighted index, the larger a company’s market capitalization, the more influence it has on the index. Market capitalization is calculated by multiplying a company’s stock price by the number of shares outstanding.
As a result, large companies such as Microsoft Corp. (ticker: MSFT), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOG, GOOGL) and JPMorgan Chase & Co. (JPM) dominate these indexes. These companies are often referred to as “blue chips.”
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“The term ‘blue chip’ was coined by Dow Jones employee Oliver Gingold in the 1920s to denote stocks that had the highest prices, usually above $200,” says Justin Zacks, vice president of strategy and spokesperson at Moomoo, a brokerage platform. “Blue chip is a reference to the blue poker chips which are often assigned the highest value in a three-color poker chip set.”
While there isn’t a formal set of criteria that defines a blue-chip stock, most share a few key characteristics that make them desirable long-term investments.
“Blue-chip stocks are not only the largest stocks by market capitalization, but ones which have a proven track record, a reputation for stability, consistent profitability, a strong balance sheet, low leverage, low default risk and are a household name brand,” Zacks says. “Companies with a blue-chip profile generally are better able to weather a downturn in the economic cycle due to their fortress balance sheets.”
For instance, the Fidelity Blue Chip Growth Fund (FBGRX) and the Fidelity Blue Chip Value Fund (FBCVX) both define blue-chip stocks as companies that are “well-known, well-established and well-capitalized.” These are companies that have established dominance in their respective industries and tend to maintain a solid financial standing across various market conditions.
Here are nine of the best blue-chip ETFs to buy in 2024:
| ETF | Expense ratio |
| Invesco Dow Jones Industrial Average Dividend ETF (DJD) | 0.07% |
| Invesco S&P 500 Top 50 ETF (XLG) | 0.20% |
| Invesco S&P 100 Equal Weight ETF (EQWL) | 0.25% |
| Vanguard Mega Cap ETF (MGC) | 0.07% |
| iShares MSCI USA Quality Factor ETF (QUAL) | 0.15% |
| Principal U.S. Mega-Cap ETF (USMC) | 0.12% |
| Amplify CWP Enhanced Dividend Income ETF (DIVO) | 0.56% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 0.06% |
| S&P 500 Dividend Aristocrats ETF (NOBL) | 0.35% |
Invesco Dow Jones Industrial Average Dividend ETF (DJD)
“ETFs which track the Dow Jones Industrial Average, or DJIA, are one of the first places investors look for a diversified portfolio of blue-chip stocks,” Zacks says. For a unique twist on the Dow, investors can buy DJD, which weights the dividend-paying Dow stocks by yield instead of price.
On a semi-annual basis, DJD’s companies are rebalanced based on their trailing-12-month dividend yield. Essentially, you can think of DJD as an automated way to target a strategy similar to the “Dogs of the Dow” method of stock-picking. DJD charges a 0.07% expense ratio and pays a 2.9% 30-day SEC yield.
Invesco S&P 500 Top 50 ETF (XLG)
“XLG provides exposure to the 50 largest stocks in the S&P 500,” says Nick Kalivas, head of factor and core equity ETF strategy at Invesco. “Besides exposure to large companies, XLG is currently tilted toward the quality, growth and momentum factors.” The ETF charges a 0.2% expense ratio.
“XLG is currently overweight technology and communication services, and underweight industrials and financials compared to the S&P 500,” Kalivas notes. Investors who buy XLG should be comfortable with a top-heavy composition given that Microsoft and Apple account for 23% of it.
Invesco S&P 100 Equal Weight ETF (EQWL)
“By equally weighting the members of the S&P 100 Index, EQWL reduces the concentration present in the cap-weighted parent index,” Kalivas notes. This ETF can be an excellent core holding for investors who want blue-chip exposure, but with reduced concentration in single stocks or sectors.
EQWL’s sector composition is quite balanced, with financials receiving the highest exposure at 17.9%, followed by health care, technology and industrials at 14.4%, 14.3% and 13.1%, respectively. At each quarterly rebalance, each of the 100 companies in EQWL is re-weighted to a 1% allocation.
Vanguard Mega Cap ETF (MGC)
“When comparing ETFs, prioritize those with substantial assets under management, long track records and low expense ratios to ensure a more stable and cost-effective investment,” says Henry Yoshida, CEO and co-founder of Rocket Dollar. When it comes to blue-chip ETFs, few beat MGC on these factors.
This Vanguard ETF tracks the CRSP U.S. Mega Cap Index, which contains the largest 70% of U.S. stocks by market capitalization. It is fairly diversified with 197 holdings and tax-efficient with a minimal 2.4% turnover rate. Like many Vanguard ETFs, MGC is also very affordable with a low 0.07% expense ratio.
iShares MSCI USA Quality Factor ETF (QUAL)
“Quality factor ETFs can offer exposure to blue-chip stocks,” Zacks says. “These ETFs often screen for stocks that have stable earnings growth and low leverage, both of which are characteristics of blue chips.” A great example is QUAL, which tracks the MSCI USA Sector Neutral Quality Index.
This ETF maintains a similar sector composition to the broad U.S. market but selects stocks within each sector that have higher return on equity, lower leverage and reduced earnings variability. It charges a 0.15% expense ratio and has returned an annualized 13.3% over the past 10 years.
[7 Best Monthly Dividend ETFs to Buy Now]
Principal U.S. Mega-Cap ETF (USMC)
“It’s prudent for investors to look beyond an ETF’s name and investment theme, as smaller funds risk being shut down or rolled into larger existing ETFs within the same investment house,” Yoshida notes. This is especially important for investors considering ETFs from smaller, boutique fund managers.
However, there are some successful, albeit lesser-known ETFs out there. A great example is USMC, which offers true active management with a high-conviction portfolio of 25 blue-chip stocks. USMC charges a reasonable 0.12% expense ratio and has returned an annualized 14.4% since its inception in October 2017.
Amplify CWP Enhanced Dividend Income ETF (DIVO)
Looking for blue-chip exposure, but with enhanced income potential? The ETF to watch is DIVO, which combines active management with a covered call strategy. The ETF starts by picking 20 to 25 high-quality, large-cap U.S. stocks from 10 sectors selected for strong dividend and earnings growth.
To augment yield, DIVO can write covered calls on individual stocks. This reduces upside price return but produces consistent monthly income. Currently, DIVO is paying a 4.8% distribution yield. The ETF is a top performer in Morningstar’s “derivative income” fund category, with a five-star rating.
Schwab U.S. Dividend Equity ETF (SCHD)
DIVO’s use of covered calls produces decent income, but it can be expensive and reduce upside potential. For a cheaper, simpler option to blue-chip dividend stocks, consider SCHD. This ETF tracks the Dow Jones U.S. Dividend 100 Index for a 0.06% expense ratio and pays a 3.7% 30-day SEC yield.
SCHD selects its stocks using a multi-faceted, rigorous screener that requires 10 years of consecutive dividend payments, plus a composite score that assesses free cash flow to total debt, return on equity, dividend yield and five-year dividend growth rate. The ETF is reconstituted annually.
S&P 500 Dividend Aristocrats ETF (NOBL)
The S&P 500 index has a special cohort of blue-chip stocks called “Dividend Aristocrats.” These are companies that have increased their dividends consecutively for at least 25 years. As a whole, the Dividend Aristocrats tend to have strong fundamentals and robust profitability.
To capture these stocks, investors can buy NOBL. This ETF equal-weights the current 66 Dividend Aristocrats with a tilt toward consumer staples and industrial companies such as Coca-Cola Co. (KO) and General Dynamics Corp. (GD). It charges a 0.35% expense ratio and pays a 2% 12-month yield.
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Update 09/13/24: This story was previously published at an earlier date and has been updated with new information.
