3 Extended Market ETFs To Round Out Your Portfolio

ETF investors are spoiled by the tremendous number of quality choices for building their diversified stock allocations. The sheer breadth of selection across market cap, sector, industry, and factor-based strategies ensures there is something for virtually everyone.

Yet, one of the lesser understood qualities of exchange-traded funds are their ability to simplify your portfolio. You can own hundreds or even thousands of stocks in a single holding with extremely low costs and impeccable tracking efficiency. That eliminates the need to screen numerous positions and creates benefits of widening your exposure profile.

That powerful concept is the driver behind “extended market” ETFs. These passive indexes are designed to extend your stock allocation outside of the traditional large-cap arena into a highly-disbursed mix of small and mid-cap companies.

The largest fund in this category is the Vanguard Extended Market ETF (VXF). This passive index ETF owns 3,269 stocks outside of the S&P 500 Index. Each of the holdings within VXF are market-cap weighted to give a similar distribution of capital as a total market fund. VXF has $4.6 billion in total assets and charges an expense ratio of just 0.09% annually.

This type of position is designed to be paired with a traditional large-cap index such as the SPDR S&P 500 ETF (SPY) that is a favorite among so many U.S. investors. It can also take the place of holding multiple small and mid-cap ETFs, while still retaining the same exposure tolerances.

As you can see on the comparison chart below, the smaller company exposure within VXF has truly shined over the last year. Small cap stocks are generally considered to be riskier than their large-cap peers, which often adds additional momentum in both sustained uptrends and downtrends.

Another polished extended market ETF for investors to consider is the PowerShares FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ). This fund owns 1,394 small and midcap stocks that are selected based on book value, cash flow, sales and dividends. These measures demonstrate some enhanced criteria for inclusion within the index and the weighting of each holding is based on the fundamental score.

PRZF has $1.6 billion in total assets and charges a modestly higher expense ratio of 0.39% annually. Top sector weightings within this fund include: financials, industrials, and information technology companies.

Lastly, for those who are seeking international exposure, the Powershares FTSE RAFI Developed Markets ex-US Small-Mid ETF (PDN) may be a good fit. This fund is inclusive of nearly 1,500 small and mid-cap stocks of developed foreign nations using a similar fundamental screening methodology as PRFZ.

PDN would likely be coveted for those who want to broaden their exposure outside a conventional large cap international fund such as the iShares MSCI EAFE ETF (EFA). Pairing the two together creates a more comprehensive investment profile for stocks domiciled outside the United States. Furthermore, the ability to independently size the exposure of large versus small/mid-cap is a key reason to select this type of ETF over an overarching global strategy.

The Bottom Line

Extended market ETFs can be appropriate for both sophisticated and simplified portfolios depending on the needs or experience of the user. They function as a bridge to building a truly diversified equity allocation with the added benefits of low costs, liquidity, and tax efficiency.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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