Arguably, most investors put too much of their resources into
large cap U.S. stocks. After all, companies in this segment are
among the biggest and most well-known in the world and include
firms that dominate their industries and seem unlikely to be
wiped from the world stage anytime soon.
For this reason, large caps are probably safer than their
small and mid cap cousins which are often overshadowed in many
portfolios. This is despite research that shows-although small
stocks are more volatile-that these pint sized securities have
outperformed their large cap counterparts by a pretty wide margin
over a long time period (read
Track Market Gurus with these ETFs
).
In fact, a recent study showed that small caps beat out large
caps by 200 basis points a year,
on average since 1926
. With results like these over such a lengthy time frame, it may
not be a bad idea for large cap investors to consider adding a
tad more to their small and mid cap holdings.
Unfortunately, stock selection in both the mid cap and small
cap segments are inherently more risky than in the large cap
world. That is because much less research is done on these small
securities while their economic moats are often less favorable
than those that have established a global presence in a given
industry. Furthermore, mid caps, and to a greater extent small
caps, have higher betas so when markets are sliding they are
bound to be more hurt than their peers.
With this backdrop, a broad ETF approach could be the way to
go in order to get all of the benefits of the small and mid caps
while at a lower risk level. For investors who find this
technique intriguing, a look to any of the U.S. 'completion ETFs'
could be a great idea (read
The Truth about Low Volume ETFs
).
That is because these ETFs allocate assets to both small and
mid caps, helping to round out portfolios that are too heavily
concentrated in large cap securities. Furthermore, unlike total
market ETFs, they prevent double exposure to big companies,
allowing investors to achieve a more well-rounded portfolio.
While any of the following could easily accomplish this task
and have many similarities, we have highlighted some of the key
differences from these completion ETFs for investors looking to
obtain a more diversified portfolio across a variety of market
cap levels while still focusing in on the American market:
Vanguard Extended Market Index Fund (
VXF
)
For the cheapest choice in the space, investors should look to
VXF for their small and mid cap exposure. This fund tracks the
S&P Completion Index which looks to match the performance of
virtually all U.S. stocks outside of the S&P 500
benchmark.
The ETF does a great job of spreading exposure across a
variety of securities as only 4.6% of assets are in the top ten
holdings. From a sector look, financials take the top spot, while
consumer discretionary is second and industrials and technology
round out the top four (read
Three Tech ETFs Rocked by Google's Earnings
Miss
).
The product is actually the cheapest in the space as well,
coming in at 0.14% a year in fees. Furthermore, the product's
high volume and AUM suggest a tight bid ask spread, meaning that
total costs are unlikely to be too much higher than this stated
figure for virtually all stripes of investors.
Wilshire 4500 Completion ETF (
WXSP
)
For another look at the small and mid cap market, investors
have WXSP from Guggenheim. This product tracks the Wilshire 4500
Completion Index which is a benchmark that consists of nearly
3,470 American stocks.
The fund, however, tracks a relatively small subset, holding
1,480 companies in total, with an average market cap just over $4
billion. In terms of holdings, no one company makes up more than
1% of assets, while financials, consumer discretionary, and
technology take the top three spots from a sector look (see
the Guide to Consumer Staples ETFs
).
Expenses for this product rival VXF, coming in at 0.18% a year
in fees, although bid ask spreads are likely to be far higher.
Still, the product represents a solid choice for investors that
is also well balanced among the various styles as well (growth
and value).
PowerShares FTSE RAFI 1500 Small-Mid Portfolio (
PRFZ
)
The last ETF on the list uses the RAFI system to weight small
and mid cap stocks for inclusion in a portfolio. The ETF tracks
the FTSE RAFI US 1500 Small-Mid Index, weighting stocks on
factors like book value, cash flow, sales, and dividends instead
of the more 'traditional' market cap system.
The product is pretty well spread out as just 0.3% is in the
top holding, giving the fund incredible diversification. From a
sector perspective, financials, consumer discretionary, and
technology take the top three spots (see
Three ETFs with Incredible Diversification
).
Expenses on this fund are a little higher than what some of
the other products are seeing, coming in just under 40 basis
points a year. However, AUM is relatively high at close to half a
billion, so bid ask spreads should be relatively tight for this
fund.
|
|
VXF
|
WXSP
|
PRFZ
|
|
Total Holdings
|
1,855
|
1,480
|
1,465
|
|
Mid Caps
|
39%
|
36%
|
8%
|
|
Expense Ratio
|
0.14%
|
0.18%
|
0.39%
|
|
AUM
|
$1.4 bil
|
$6.5 mil
|
$450 mil
|
|
Annual Yield
|
0.98%
|
0.80%
|
1.16%
|
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PWRSH-F/R US150 (PRFZ): ETF Research Reports
VIPERS-EXTD MKT (VXF): ETF Research Reports
WILSHR-4500 COM (WXSP): ETF Research Reports
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