The Ultimate Guide To Total Market ETFs (IYY, IWV, TMW, VTI, SCHB)
Eric Dutram: After posting double digit returns for the first quarter in fiscal 2012, the U.S stock markets could not extend their gains further in the second quarter. The weak global economic condition added to the woes of the investors, triggering massive sell-offs from the equity markets in developed as well as emerging nations.
In times like these, investor sentiments turns negative as investors seek solace in safe securities such as Treasury Bonds and other U.S Dollar denominated assets (read ETF Trading Report: Treasury, Emerging Market Bond ETFs In Focus). Not only has this phenomenon made investing in the long dated U.S Treasury Bonds extremely unattractive (due to extremely low yields and high prices) but also led to the appreciation of the U.S Dollar against other major currencies (see Indian Rupee ETFs: Is The Slide Over?).
For stock investors, large cap stocks have always been the way to go for safety and for long term capital appreciation. While large caps can be thought of as a more stable investment avenue than their mid and small cap counterparts, the flip side also holds true. Mid and small caps are generally more volatile than large caps and the broader markets as a whole, and therefore tend to outperform the broader markets during an uptrend (read Guide to Small Cap Emerging Market ETFs).
Total Market ETFs
Given these trends, a broad focus on the total market could be the way to go in order to obtain a nice mix of safety and growth. In order to do this, investors should probably look to any number of the total market ETFs currently on the market.
These funds do not exclude any particular segment from their portfolios and instead have a wide range of firms in their baskets. Furthermore, while the holdings profile is often similar to S&P 500 products, the inclusion of small and micro caps in the ETF helps to boost growth and volatility while not influencing the product’s risk/return profile too much.
Investors should also note that funds in this total market segment are among the cheapest in the ETF world as well. These funds are also usually holding hundreds, if not thousands, of securities in their baskets, suggesting high levels of diversification for an extremely small cost (read Guide to the 25 Cheapest ETFs).
For investors curious about purchasing a product in this segment, we have highlighted the main options below along with a discussion of the big differences between each of the popular products in this space:
iShares Dow Jones U.S. Index (NYSEARCA:IYY)
Launched in June of 2000, IYY seeks to match the pre-expenses price and yield performance of the Dow Jones U.S. Index. The investment theme of the ETF is to replicate the performance of broad based U.S. equity markets. The index covers approximately 95% of the entire market capitalization in the U.S markets.
At present the ETF holds 1325 securities in all and has allocated 17.88% of its total assets in the top 10 holdings. Slightly higher allocations are given to large cap giants such as Apple Inc. (3.80%), Exxon Mobil Corp (2.81%) and Microsoft Corp (1.60%). From a sector perspective, the assets of the ETF are well spread across all sectors (read ETF Trading Report: Pharma, Consumer ETFs In Focus).
However, due to the market capitalization weighting methodology of the index, sectors like Information Technology (16.66%) and Financials (15.91%) get slightly higher allocations as these sectors account for companies with highest market capitalization in the U.S equity markets.
It charges 20 basis points in fees and expenses and has an asset base of $612.33 million. On average, 59,907 shares of IYY are traded each day. The ETF has returned 2.47% in the last one year.
iShares Russell 3000 Index (NYSEARCA:IWV)
The ETF tracks the Russell 3000 Index which is a float adjusted market capitalization weighted index designed to mimic the performance of the broad based U.S. equity markets. The index is comprised of 3000 securities which include growth as well as value stocks and the index portfolio is rebalanced annually (see Try Value Investing With These Large Cap ETFs).
The ETF is comprised of stocks from the entire market cap spectrum, from large caps to small and micro cap stocks. Since IWY captures the true essence of the broader U.S. equity markets, the ETF qualifies to be a part of the core holdings of a portfolio. With an expense ratio of 0.20%, IWY is surely a low cost choice for investors having a bullish outlook towards the U.S. stock markets.
Like other broad based funds, IWY employs a passive indexing approach which explains the low expense ratio for the products. Moreover, the blend between value and growth would enable an investor to have a pure play on momentum as well as value by capitalizing on bullish market reversals and capital appreciation over the long term.
The ETF currently holds 2,997 securities in its portfolio and allocates 16.95% of its total assets in the top 10 holdings. It has an asset base of approximately $3.35 billion and an average daily volume of 278,725 shares.
SPDR Dow Jones Total Market (NYSEARCA:TMW)
The ETF was launched on October of 2000 and since then has witnessed inflows of $427.27 million. It tracks the Dow Jones U.S. Total Stock Market Index which is a float adjusted market capitalization weighted index.
Unlike IWV, this ETF does not use a full replication strategy to include stocks from its underlying index. Instead, it picks only those stocks which best replicate the index.
Thanks to this focus, the index is comprised of 3,691 securities but the ETF only has 982 securities in its basket. The portfolio is composed of stocks having a blend of value as well as growth.
The performance of the ETF would replicate the overall performance of the broad based U.S equity markets. However, by not choosing to fully replicate the index in terms of holdings, the ETF increases the probability of a modest tracking error.
Still, the fund distributes a higher allocation towards sectors representing higher proportion of market capitalization such as Information Technology and Financials. As far as concentration is concerned, 17.51% of its total assets are found in the top 10 holdings.
Vanguard Total Stock Market ETF (NYSEARCA:VTI)
Launched in May of 2001, Vanguard Total Stock Market ETF (VTI) is another solid product among total market ETFs. It tracks the MSCI U.S. Broad Market Index which is a combination of the MSCI U.S. Investable Market Index and the MSCI Micro Cap Index. This combination enables the underlying index to track almost all publicly traded companies in the U.S. stock markets (read Three Low Beta ETFs for the Uncertain Market).
VTI provides an excellent opportunity for investors to play the U.S stock markets as the ETF covers stocks from giant large caps to micro caps. With an expense ratio of 0.06% and holdings of over 3,000 securities, it is one of the most inexpensive and diversified ETFs available.
As far as liquidity is concerned, on an average approximately 2.03 million shares of VTI are traded each day. Also, since the ETF fully replicates the index, the chances of high tracking error are almost eliminated. The index is a float adjusted market capitalization weighted index, therefore slightly higher allocations are given to heavyweight large cap stocks. For investors seeking to play the total U.S. stock markets, VTI could prove to be an excellent choice (see The Five Best ETFs over the Past Five Years).
Schwab U.S. Broad Market ETF (NYSEARCA:SCHB)
SCHB tracks the performance of U.S. listed stocks from the entire spectrum of market capitalization as defined by the Dow Jones U.S. Broad Stock Market Total Return Index.
The index holds around 2500 securities and it is a market capitalization weighted index adjusted for float.
SCHB, which debuted in November of 2009, has $1.01 billion of total assets. It charges investors a paltry 6 basis points in fees and expenses and has an average daily volume of 278,480 shares.
Although all the total market ETFs are very similar in terms of investment theme, goals, objectives, portfolio composition and expense structure, there are small differences that might go a long way in influencing investment decisions for investors seeking exposure in the U.S. total market ETF segment. The following table summarizes the differences between the ETFs discussed above:
|ETF Ticker||Total Assets||Expense Ratio||Coverage (No. of Holdings)||Liquidity (Average Daily Volume)||1 Year ETF Returns (as on 6/30/2012)|
|IYY||$612.33 million||0.20%||1,325||59,907 shares||2.47%|
|IWV||$3.35 billion||0.20%||2,997||278,725 shares||2.24%|
|TMW||$427.27 million||0.20%||9,82||25,068 shares||2.68%|
|VTI||$21.55 billion||0.06%||3,302||2,031,673 shares||2.52%|
|SCHB||$1.01 billion||0.06%||1,800||278,480 shares||2.54%|
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