ETF Monkey Focus: Equity - U.S. Total Market ETFs

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Includes: BLK, ITOT, IWV, SCHB, SCHW, THRK, VTHR, VTI
by: ETF Monkey

Summary

This is the inaugural article of what I hope will prove to be a long-running series here on Seeking Alpha.

I will begin this article with an introduction to the series, including the basis for my ETF selections as well as helpful common features readers will find in each article.

Every investor desirous of developing an ETF-based portfolio does well to start by selecting a few core holdings.

For most U.S. investors, the first ETF you should add to your portfolio should be a top-quality U.S. total stock market ETF.

In this article, I will evaluate 5 candidates, and select 3 winners and 2 runner-ups.

This is the inaugural article of the "ETF Monkey Focus" series. It is my hope that this will prove to be a long-running series here on Seeking Alpha.

Series Introduction - Overview and Common Features

As my readers are well aware, I believe that low expenses and diversification form two "solid anchors" of a well-constructed portfolio.

To satisfy that first anchor, as my starting point for this series I ran a screen to reveal all ETFs with an expense ratio below .20%. I found 181 ETFs that meet this first criteria.

Since they include both equity and fixed income and cross a wide variety of sectors and asset classes, an investor will be able to use the ETFs I feature to build a world-class portfolio that satisfies that second anchor; diversification.

These articles will be based on asset class or sector. In each article, I will likely write on somewhere between 2-5 ETFs.

Ultimately, I will not report on all 181 ETFs. Some will either be too small, or too new, for me to present them as serious competitors in my comparative evaluations. Additionally, from time to time I may choose to at least mention a noteworthy competitor with an expense ratio greater than .19%. By the time I am done, however, I fully expect to have written on somewhere north of 100 ETFs.

I plan to include features that I hope will make these articles very useful tools for an investor as they begin their research. Here, briefly, are some of those features.

First, each article will include an introductory table featuring key profile information for each ETF. As an aid to further research, if available, the name of each ETF, as well as the index it tracks, will actually be links to the provider's information sheet for that ETF or index.

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To the extent that some of the terms in the table might be unclear, I will attempt to include some definitions. Here is an example:

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Here is a look at the information this introductory table will contain in the case of fixed income ETFs:

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Additionally, in many of the articles on equity ETFs, I hope to include one additional table containing some form of high-level sector information that may help the investor understand each ETF at a big-picture level. In the case of U.S. Total Market ETFs, I will feature just that, sectors. In the case of an international ETF, I may feature the breakdown by country.

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I hope readers find all of these features useful.

Well, that's it for the overview. Let's get started with our first evaluation, shall we?

Equity: U.S. Total-Market ETFs

For most U.S. investors, the first ETF you should add to your portfolio should be a top-quality U.S. total stock market ETF. As opposed to the S&P 500, which is comprised solely of large companies (large-cap), the landscape covered by these ETFs also encompasses many smaller companies (mid-cap, small-cap, and even micro-cap). Such companies, while offering a higher level of risk than their larger brethren, also offer greater opportunities for growth.

There are several worthy competitors in the marketplace. And, they may be even more worthy if your brokerage offers commission-free trading in these ETFs; particularly if one of your goals is to invest regularly and in small increments.

In this article, we will briefly review five such ETFs. As will be seen, I have selected three as the best of the group, with two runner-ups.

The Best

The following ETFs are, in my opinion, your best choices in this asset class. In the following table, you will find key high-level profile and portfolio information.

ITOT SCHB VTI
ETF Name iShares Core S&P Total U.S. Stock Market ETF Schwab U.S. Broad Market ETF Vanguard Total Stock Market ETF
Assets Under Management (AUM) $4.7 Billion $6.9 Billion $64.8 Billion
Index Tracked S&P Total Market Index Dow Jones U.S. Broad Stock Market Index CRSP Total U.S. Market Index
Number of Holdings 3,709 1,990 3,613
Weighting of Top-10 Holdings 14.9% 14.9% 15.7%
30-Day SEC Yield 1.97% 1.99% 1.95%
Expense Ratio .03% .03% .05%
Average Spread .04% .03% .01%
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Notes on terms that may be unclear:

  • 30-Day SEC Yield refers to the dividend income available to shareholders minus the fund's expenses for the most recent 30-day period. This measurement was introduced by the SEC to ensure fair comparative reporting between funds.
  • Average Spread refers to the average price difference between the price buyers were willing to pay and sellers were willing to sell, averaged over the latest 45 days.

Next, in the second table, is the sector breakdown of all 3 ETFs.

ITOT SCHB* VTI
Consumer Discretionary 12.38% 12.30% 13.20%
Consumer Staples 8.62% 8.50% 10.20%
Energy 7.01% 6.20% 6.70%
Financials 14.10% 12.80% 18.90%
Health Care 13.95% 13.70% 13.30%
Industrials 10.65% 9.70% 12.80%
Materials 3.28% 3.10% 2.50%
Other 0.20% 4.00% 0.00%
Real Estate 3.93% 4.40% 0.00%
Technology 20.49% 19.70% 16.70%
Telecommunications 2.22% 2.40% 2.40%
Utilities 3.17% 3.20% 3.30%
TOTAL 100.0% 100.0% 100.0%
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* NOTE: The displayed percentages on the Schwab website only added up to 93.60% and there was no % displayed for Telecommunications. So, I used a "ballpark" number of 2.40% and entered the remaining 4.00% as "Other."

Here is a brief overview of each of the ETFs, in alphabetical order by ticker symbol.

iShares Core S&P Total U.S. Stock Market

ITOT has an inception date of 1/20/04, giving it a long track record. In December, 2015, BlackRock (NYSE:BLK) made a couple of significant changes to deal with an increasingly competitive landscape. First, they dropped ITOT's expense ratio to an industry-leading .03%, besting VTI's .05% ratio and SCHB's .04% ratio. However, Charles Schwab (NYSE:SCHW) immediately responded by dropping SCHB's expense ratio to .03% as well. As shown in the first table in the article, that is how things still stand as of this writing.

At the same time, however, BlackRock made a second change I consider to be just as, if not more, important. Prior to that date, ITOT tracked the S&P Composite 1500 Index. This index was not as deep as those tracked by either SCHB or VTI. In contrast, ITOT now tracks the S&P Total Market Index. With 3,829 constituents, this index moves directly into competition with the index used for VTI.

Due to its smaller size, at .04% ITOT carries a slightly higher average trading spread than either SCHB or VTI. However, this small difference would affect only the most active of traders.

For more on ITOT, feel free to consider this in-depth article I previously wrote for Seeking Alpha.

Here is a look at ITOT's Top-10 holdings.

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Schwab U.S. Broad Market

As noted in the previous section, with an expense ratio of .03%, SCHB is tied with ITOT as the lowest-priced offerings in this asset class. At the same time, it is not quite as broad or deep as either VTI or ITOT in terms of complete market coverage.

SCHB tracks the Dow Jones U.S. Broad Stock Market Index. Basically, this index includes the largest 2,500 stocks in the U.S. market, therefore excluding micro-caps and some small-caps. As of 9/16/16 SCHB contains 1,990 holdings, a little more than half of VTI and ITOT. The reason SCHB contains approximately 500 less stocks than the index it tracks is that Schwab makes use of statistical sampling techniques to replicate the index. This technique is used when the ETF provider takes the view that the trading costs involved in attempting to purchase every security in the index would lead to a greater tracking error (or divergence from the index) than their actual practice of sampling the index.

Viewed from a critical standpoint, then, this ETF could be considered slightly less of a genuinely "total market" fund than either ITOT or VTI. At the same time, its rock-bottom expense ratio combined with its substantial size and great tradeability make it a solid choice.

Here is a look at SCHB's Top-10 holdings.

Vanguard Total Stock Market

VTI tracks essentially the entire investable U.S. market in a single ETF. It does so by tracking the CRSP U.S. Total Market Index.

At .05%, VTI still carries one of the lowest expense ratios in the ETF marketplace. As you compared the various ETFs in the first table, likely the first thing that jumped out at you was VTI's size. With AUM of $64.8 billion, it is no exaggeration to say that it dwarfs the competition. As a result, while ITOT and SCHB now offer an even lower .03% expense ratio, VTI's size gives it a market-leading .01% average trading spread, making it easily the most tradeable ETF in this segment.

The other thing you may have noted in the second table is that VTI contains a lower weighting in technology than the competition.

For more on VTI, feel free to review a previous in-depth article I wrote for Seeking Alpha, in preparation for including it in The ETF Monkey Vanguard Core Portfolio.

Here is a look at VTI's Top-10 holdings.

The Rest

In my research, I found 2 other ETFs meeting my criteria for inclusion in this article, namely an expense ratio of less than .20% and sufficient size to be reasonably tradeable.

Symbol ETF Name Expense Ratio Average Spread $ AUM
THRK SPDR Russell 3000 ETF .11% .31% 298.3M
VTHR Vanguard Russell 3000 ETF .15% .10% 280.8M
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Both of these ETFs track the Russell 3000 Index. In terms of total market coverage, this index falls somewhere in between the indexes tracked by ITOT and VTI and the index tracked by SCHB. However, you will note that the two ETFs listed above have both a higher expense ratio and lower AUM than any of our 3 winners, leading to higher trading spreads. For these reasons, I believe you would be better off selecting either ITOT, SCHB or VTI as your core holding for this segment.

  • NOTE: With an expense ratio of .20%, the iShares Russell 3000 ETF (NYSEARCA:IWV) barely missed my arbitrary cutoff of "below .20%." However, its size, long track record, and lower average spread of .03% would, in my opinion, make it a better option than either THRK or VTHR for an investor interested in the same underlying index.

Summary and Conclusion

Finally, here is a chart of 3-year returns for all five ETFs for your review.

ITOT Chart

ITOT data by YCharts

In summary, while any of these five ETFs would do a nice job serving as a core holding in your portfolio, I believe you would be most benefited by selecting either ITOT, SCHB or VTI. Lower expenses along with greater size and tradeability are a winning combination.

It may come as no surprise that these are the 3 ETFs I selected for the three implementations of The ETF Monkey 2016 Model Portfolio.

Until next time, I bid you...

Happy investing!

Author's note: At the top of this article, next to my name, you will see a "Follow" button. If you like my work, I would be profoundly grateful if you would take a minute to do this, as well as feature my work to friends, colleagues and/or relatives who may be interested in the subject matter. Growing one's readership base is critical to any author and I am no exception. Your support will enable me to continue my efforts.

Disclosure: I am/we are long ITOT, VTI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.