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
(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
(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
(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
(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
(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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ISHARS-RS 3K (IWV): ETF Research Reports
ISHARS-DJ US IF (IYY): ETF Research Reports
SCHWAB-US BR MK (SCHB): ETF Research Reports
STREET-TOT MKT (TMW): ETF Research Reports
VIPERS-TOT STK (VTI): ETF Research Reports
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