Almost every investor who comes to the stock market immediately comes across such a term as "blue chips". However, most investors do not fully understand what its meaning is, and where and how to view the list of blue chips.
And indeed, the concept of "blue chips" is a somewhat informal and unformalized concept. There is no clearly drawn up list of blue-chip stocks. This definition is not assigned by the exchange, and the very concept of "blue chips" is also sometimes interpreted differently.
In this article, we will clarify the main points that relate to the definition of" blue chips " in the American market. In particular:
- Let's consider the definition of "blue chips" in the US market and how it should be understood.
- Let's consider the main criteria that determine the "blue chips" attribute.
- In practice, we will form a list of" blue chips " of US stocks.
- Let's figure out whether it is worth investing in "blue chips" in the American market.
Read more: Investments
The concept of "blue chips" in the US market
The very concept and the term "blue chips" came to the stock market from poker, where the most attractive and valuable chips were designated by such a term.
Regarding stocks, the concept of "blue chips" can be interpreted as follows - these are the most popular and popular shares of the largest US companies on the market. It is important to understand and not to confuse the concept of popularity and demand for shares with the concept of investment attractiveness of securities.
Stocks on the market can be popular and in demand for various reasons. These may be speculatively "terminated" securities, local flows of large index funds may be directed to shares. The quotations of these shares can also grow, but at the same time, according to their fundamental indicators, they may be completely unattractive securities, and their growth may not be supported by their financial indicators.
Criteria for "blue chips" in the US market
So, let's note the main market criteria that determine the "blue chips" criterion for stocks on the American market.
Read more: How to invest in stocks and what you need to know
Index equities
Without fail, shares that are "blue chips" must be index securities, that is, they must be included in one or more non-composite stock indices (broad market indices). There are two most important and indicative stock indices in the US market. These are the S&P500 index (you can read more about this index in our article "S&P500 Index") and the NASDAQ 100 index. These indices include the largest American companies by capitalization.
Why is entering the indices so important for blue-chip stocks? The thing is that on the basis of these two indices, most of the ETF funds ("ETF funds") are formed, which are compiled on the principle of complete physical duplication of the stock index. This is a real physical duplication of the index, that is, the operator of the ETF fund must buy the securities included in the index on the market, and in the future fully monitor and repeat the index structure. This ensures physical demand for securities, makes shares in demand, increases their liquidity and increases trading volumes. According to the same criterion, shares can be included and excluded from the list of "blue chips", depending on whether the shares are included or excluded from the stock index.
Read more: Exchange Trade Funds (ETF)
ESG investing
The world is changing rapidly, and new conditions are emerging that define blue-chip stocks. One of these new conditions is the ESG investment standards. The abbreviation ESG is taken from the English words "Environmental, Social, Governance", which translates as "environmental friendliness, social responsibility and the policy of state values".
Now companies in the US market are officially assigned the ESG standard, that is, these are companies that fight for the environment (reducing harmful emissions, increasing the environmental friendliness of production), show social responsibility (labor and health protection, improving working conditions, social protection and gender equality), adhere to the principles of state values (fighting corruption, tax policy, donations and membership in various charitable foundations).
Why is the ESG investment standard so critical for blue-chip stocks? And again, this concerns the demand for shares and the inflow of capital into them. The thing is that the investment policy of the vast majority of ETF funds, mutual funds, hedge funds in the United States already introduces a barrier criterion for investing only in companies that meet ESG standards. This directly affects the funds ' cash flows, and naturally, to a greater extent they are directed to companies that meet ESG standards, which in turn makes such shares more in demand on the market, they have more liquidity and higher trading turnover.
Read more: Warren Buffett: 10 golden rules of domination
Capitalization of companies
Only the largest companies in terms of market capitalization fall into the" blue chips". Indirectly, the fact that the company has a high capitalization confirms its entry into the index, since the principles of forming most market indices are the inclusion of the most capitalized companies in the market in their composition. Companies that have a market capitalization of more than 100 billion US dollars can be considered passing the criteria of the "blue chips" of the American market. With such a capitalization, the company is guaranteed to get into the majority of market indices.
Liquidity and turnover of stock trades
First of all, the high liquidity of shares and a large trading turnover indicate that the paper is interesting from a speculative point of view. This has both its advantages and certain disadvantages. On the one hand, liquid stocks can always be easily bought and easily sold, because there is always supply and demand for them, and the difference between the price of supply and demand is low. This constant demand is provided by speculators who are ready to buy and sell these shares in the same second of time. On the other hand, this "rocks the boat", such stocks are usually more volatile and react more sharply to all general market trends.
In general, it can be noted that if earlier, from the point of view of determining blue-chip stocks, the criterion of liquidity and trading volume was paramount, now this criterion is fading into the background. Indirectly, the high liquidity of securities and high turnover on them provide the criteria for entering the stock index and compliance with ESG investment standards. After all, it is precisely in such stocks that the multibillion-dollar cash flows of the largest investment funds are directed, and first of all, ETF funds, which have significantly changed market realities in just a couple of decades. Knowing this, speculators also come to such shares, providing liquidity and a high trading turnover.
Read more: What is the New York Stock Exchange (NYSE)
List of "blue-chip" US stocks
Since the concept of "blue chips" is still an unofficial term, there is no pre-prepared and approved list for it that a novice investor could use. Many investors follow a simpler option and simply accept all the shares included in the S&P500 index or the NASDAQ 100 index as" blue chips "(not to be confused with the also popular NASDAQ Composite index), but this is still not a completely correct approach that does not take into account all the criteria of blue-chip stocks.
Manually on the US market, where several thousand shares are traded, it is extremely problematic to form such a list. Therefore, in this case, we recommend using a professional investment service to determine the list of "blue chips".
This service has all the necessary list of filters to select stocks according to various criteria, applying a variety of investment strategies, forming and rebalancing investment portfolios. In particular, the service's filters can be configured in such a way as to make a selection of blue-chip stocks.
In the investment filters, we can set and specify all the necessary criteria for selecting blue-chip stocks, such as: entry into the S&P500 index, compliance with ESG investment standards and a market capitalization of more than $100 billion.
As a result, we have a list of 75 American stocks that can be recognized as "blue chips". These are highly liquid shares of the largest US companies that are in demand from index funds.
At the same time, the shares in this list are ranked by capitalization, that is, at the very top of the list are the world's largest companies with the largest market capitalization. These are names such as:
- Apple inc.
- Microsoft Corporation.
- Amazon.
- Alphabet (Google).
- Facebook.
- and of course, Tesla.
Read more: About NASDAQ Stock Exchange
Is it worth investing in US blue-chip stocks?
This question is asked by the majority of investors who have determined for themselves a list of such shares. After all, it is still worth understanding that the entry of a stock into the list of "blue chips" does not indicate its investment attractiveness. This only shows that the stock is liquid, it can be easily bought and sold without significant losses. Operations with the stock are carried out by many speculative players, which means that the paper will be more volatile. The stock is also interesting for index funds, which can support securities in a certain period.
However, this is still not enough to determine whether there is an investment interest in such shares or not.
To do this, you can additionally apply a certain investment strategy to the list of "blue chips", which is aimed at choosing investment-attractive stocks with specific internal sources of growth.
By choosing the "Not overheated growth" strategy, we can filter out only those stocks whose growth rates correspond to the growth rates of the company's financial results. That is, the growth of these shares is justified and supported by the growth of the profits of these companies. The strategy automatically sets the investment filter settings according to the company's profit growth rate and the PEG multiplier, which allows you to compare the growth rate of the stock and the company's financial results. In this case, the investor can already unequivocally say that these shares are "not overheated" and do not represent an investment "bubble".
Using this strategy, the list of 75 "blue chips" is compressed to 6 stocks, but these are stocks whose growth is supported by equally good growth rates of financial results.
Investing in such securities is much more productive and safer for a long period of time. This can be easily checked on history. To do this, we will form an investment portfolio with approximately equal shares of securities from the selected list of six securities and conduct its historical testing. We will compare the results of the portfolio's capital dynamics with the dynamics of the S&P500 market index, which will allow us to evaluate the effectiveness of the compiled investment portfolio.
In this case, we see that the historical dynamics of the portfolio is ahead of the market index in terms of profitability. This is also confirmed by the investment coefficients of the portfolio, which measure the risk and return ratios of the investment portfolio.
Read more: How to choose an ETF
Conclusions
Extremely simple investment schemes, such as buying an ETF on a market index or buying only blue-chip stocks, are not the most effective and efficient investment methods. As a rule, they carry more potential risks than benefits to the investor and may seem to work only for certain periods of time.