Before understanding the different types of mutual funds and ETFs, you need to understand market cap. Market capitalization is a quick way of determining how large a company is.
To calculate market cap, take the share price and multiply it by the number of shares outstanding (meaning shares that anyone can buy). This will give you a dollar amount, which is the company’s market cap.
Here are the most common names you’ll see, as well as their corresponding market caps:
- Large cap – $10-$100 billion
- Mid cap – $2-$10 billion
- Small cap – $250 million-$2 billion
For example, let’s say Company A has a stock price of $10 and has 1 million shares outstanding. Their market cap would be:
- $10 x 100,000,000 shares = $1,000,000,000
So Company A has a market cap of $1 billion. According to the list above, this would make them a small-cap company.
Mutual funds and ETFs will often categorize themselves by the size of companies that they invest in. For example, a large-cap ETF will hold stock in only large-cap companies.
There are a few other types of market caps you may see, but not as often.
They are: mega cap (> $100 billion), micro cap (< $250 million), and nano cap (usually <$50 million).
Ideal asset allocation (and how to choose)
One thing to consider is your own personal level of risk tolerance. Everyone’s asset allocation for stocks is going to be different based on the level of risk that they’re willing to take on.
Here is the mix that I am currently investing with equities:
|30% RSP||Guggenheim S&P 500® Equal Weight ETF||RSP.IV|
|10% EWEM||Guggenheim MSCI Emerging Markets Equal Country Weight ETF||EWEM.IV|
|30% EWMC||Guggenheim S&P MidCap 400® Equal Weight ETF||EWMC.IV|
|30% EWSC||Guggenheim S&P SmallCap 600® Equal Weight ETF||EWSC.IV|
It’s important to know the difference between ETFs and mutual funds, as well as their strategies, before investing. Also, understanding market capitalization is crucial before choosing your own investment strategy.
You will also want to make sure you’re comfortable with your asset allocation so you’re not too heavily weighted in one asset class. This will help you keep a well-balanced and diversified portfolio.