Total market
ETFs
are a one-stop solution for beginning investors as well as the
default benchmark for sophisticated investors. Everyone should
have a basic understanding of total market and review its
performance occasionally. Recent years have given food for
thought.
The classic question for total market equities is how easy
they are to beat by overweighting with sub-indexes of size,
value, industry sector, etc. At first glance it might seem easy
to beat an index which includes every single company in its
universe. Surely there are obvious dogs, right? In recent years,
however, most equity sub-indexes rose and fell dramatically
together. While some protection can always be gained (or lost) by
picking sub-indexes, it was largely a distraction this time
around. The most important opportunity was rotating entirely out
of equities and then back at sensible times. Even without calling
peaks and valleys accurately, much maligned market timing did
particularly well during this cycle (but has been difficult in
others). It illustrates one of chief benefits of total market
ETFs. They allow focus on big questions of asset allocation which
are so fundamental to success at key points but are often taken
for granted.
Most investors buy and hold total market ETFs, and rightly so
because they do not have the training, time, or inclination to
constantly pick sub-indexes. Many economists argue that trading
of publicly traded stocks is so competitive that trying to beat
the market raises risk in exchange for little if any reward.
Clearly for those who stayed the course (not those who panicked
and sold when down) in total market US equities but also in total
market foreign equities, 2010 brought some vindication with
prices returning nearly to all-time highs:
For American investors the total market is commonly defined as
the universe of publicly traded US stocks weighted by
capitalization. But it is useful to consider total US bond market
ETFs in this discussion, as well as ETFs which track foreign
equities. The philosophy and focus on simple asset allocations
are the same.
These ETFs follow every security in their universe, which is
not quite as daunting as it might seem. Most ETFs use a sampling
methodology to avoid having to buy small, illiquid stocks. And
most ETFs can buy or sell index futures to handle large money
inflows and outflows.
Cost conscious investors love total market funds. Annual
expense ratios tend to be low, but that is just the visible part
of savings. Universal indexes have one boundary at the bottom
where small amounts of tiny companies come and go, so turnover
costs are dampened. Arbitrageurs have almost no opportunity to
skim value from index component additions or deletions as they do
with an index such as the S&P 500 where listing and delisting
of giant firms can be poached.
Among total market and associated ETFs are:
Basic low-cost US
- Vanguard Total Stock Market ETF (AMEX:VTI; annual fees:
0.07%
- SPDR Dow Jones Wilshire Total Market ETF (NYSEArca:TMW);
annual fees: 0.2%
- iShares Russell 3000 ETF (NYSEArca:IWV); annual fees:
0.2%
VTI uses the MSCI US Broad Market Index with about 3,800
stocks, while TMW follows the Wilshire 5000 which is one of the
most comprehensive index available with more than 5,000 US
stocks, and IWV tracks the Russell 3,000 with over 3,000 US
stocks. The broader indexes include more small companies and
therefore tend to have improved diversification, lower average
market cap, higher average growth rates, and higher risk, all in
modest amounts.
Global/International
Vanguard Total World Stock ETF (NYSEArca:VT), annual fees:
0.25%; tracks the FTSE All-World Index of about 2,900 stocks in
47 countries, including about 44% holdings in the US
SPDR MSCI ACWI ex-US ETF (NYSEArca:CWI); annual fees: 0.35%;
targets the world's publicly traded companies outside the US and
thus complementary to a US total market fund
SPDR S&P World ex-US ETF (NYSEArca:GWL); annual fees:
0.35%; very similar to CWI, this global (except US) total stock
fund sports slightly higher average market caps
Fundamental
ELEMENTS Benjamin Graham Total Market Value Total Return ETN
(NYSEArca:BVT), annual fees: 0.75%; selects 100 firms using
valuation techniques developed by Benjamin Graham, the father of
fundamental investing.
Style
iShares Russell 3000 Growth ETF (NYSEArca:IWZ), annual fees:
0.25%; carves off about 1,800 stocks in the Russell 3000 which
have higher projected growth and higher price-to-book ratios.
iShares Russell 3000 Value ETF (NYSEArca:IWW), annual fees:
0.25%; is the complementary inverse of IWZ
Balanced
PowerShares RiverFront Tactical Growth & Income Portfolio
(AMEX:PCA), is a fund of fund which contains numerous
PowerShares, iShares and Vanguard ETFs resulting in a traditional
growth and income portfolio of 50% stocks and 50% bonds with a
majority of US-based assets. A sister fund, PowerShares
RiverFront Tactical Balanced Growth Portfolio (AMEX:PAO),
allocates 80% to equities for a more aggressive stance. While
both charge 0.25% for their services, the underlying ETFs they
buy also charge. The total expense ratio to the investor depends
on holdings and has been around 0.65%. The RiverFront indexes
essentially act like a private money manager.
Claymore U.S.-1-The Capital Markets ETF (AMEX:UEM), annual
fees: 0.55%, contains exposure to 2,000 US stocks and fixed
income of every stripe, including government and quasi-government
bonds like Fannie Mae.
Lifecycle
XShares offers a line of total stock and bond funds which
change over time. These are the ultimate buy, hold and forget
funds. They start with relatively high US equity allocations and
glide down to 10% on their target date listed in their title, and
then they increase their equity allocation until it reaches 33%
where it stays put. TDX had a target date of 2007 and thus is
moving up to its final 33% equity allocation.
- XShares TDX Independence 2010 ETF; (NYSEArca:TDD); annual
fees 0.73%
- XShares TDX Independence 2020 ETF; (NYSEArca:TDH); annual
fees 0.73%
- XShares TDX Independence 2030 ETF; (NYSEArca:TDN); annual
fees 0.73%
- XShares TDX Independence 2040 ETF; (NYSEArca:TDV); annual
fees 0.73%
- XShares TDX Independence In-Target ETF; (NYSEArca:TDX);
annual fees 0.73%
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the
University of Texas at Austin.