Five ETFs That Are as Straightforward as They Come

For all the ETFs that put on the razzle-dazzle to the point of confusion, there are still plenty of transparent, obvious ETFs for the more dowdy index investors.

I agree with Matt Hougan's point on some of the newfangled ETFs. Sometimes investors have no idea what they're getting. Heck, WE have to dig around in prospecti and call up fund managers just to get some idea of what is in a fund, and this is what we DO for a living.

But for every 3 of those funds where you might not be quite sure of what you're looking at, I'd say there's at least one sound, refreshingly simple ETF for the old-time index investors among us. You know—a fully transparent ETF, where the asset class is obvious, the portfolio is diversified and the vehicle is tax-efficient.

Here's my top 5 most obviously "old school" ETFs:

5. Vanguard FTSE All-World ex-US (VEU). Of all the newish global funds, this one seems like the most logical. It covers everything equity outside the U.S. by market cap. Period. And it does it for an 0.25% annual expense ratio. SPDRS comes in a close second with two equally all-encompassing funds (all include Canada and EM) at 35 basis points. There's the SPDR MSCI ACSI ex-US (CWI) and the SPDR S&P World ex US (GWL).

4. The iShares Russell 2000 ETF (IWM). You can quibble with the turbulence around rebalance time (and it's been radically improved) or the odd creation and redemption activity in the index (as fun as ever), or maybe even how small cap the index is (Small enough? Too small at #2000?), but the simplicity of this index as a measure of U.S. small cap can't be beaten. It's #1001 to #3000 by market cap. And the price is right (0.20%)—though for price-mongers, Vanguard is running their small-cap ETF at 10 basis points.

3. The Vanguard Total Stock Market ETF (VTI). This ETF still feels like a bit of an awkward first date because of the unfamiliar MSCI index it is attached to, but you've got to think it's got the goods on broad-based transparent diversification and efficiency of index/structure, and it's certainly got the goods on cost (0.07% ER).

2. The SPDRs Total Market DJ Wilshire 5000 (TMW). My first total market index love. Like our No. 1, there's no problem in seeing what this fund represents ... with the DJ Wilshire, in fact, it's even more clear: the total TOTAL U.S. market. The only issues here are extreme illiquidity at the bottom of the index (necessitating some optimization) and the fact that it's really more like the Wilshire 7,500 or 6,000 or other depending on how many equities are trading on the U.S. market.

1. The iShares Russell 3000 ETF (IWV). The largest 3,000 stocks in the investable universe of U.S. equities covering 98% of the investable U.S. market cap. No need for optimization (the iShares fund says it has 2,932 stocks). No need for weighting-necessitated rebalancing. This index and this ETF is as simple and effective as you can get. Indexing Classic. Good old-fashioned cap-weighted, low-turnover, low fee (0.20%) diversification.

Honorable mention has to go to the two icons of indexes, the DJ Industrial Average and the S&P 500 and their respective flagship ETFs, DIA and SPY. For liquidity and U.S. blue chip representation, these are the standard; the Dow as the thermometer of the market, and the S&P as the broader large cap measure. The only issue is that Prestbo and Blitzer et al and not a formula pick them.

Comment: We're still looking for the total investable market (balanced and beyond) products. The TD Waterhouse target date products on the XShares products are the first in this category and bear looking at. The issue in this area in general is the unfamiliarity of the indices. But we're ready. And how about a total global WITH U.S.? U.S. investors are apparently still a bit too U.S.-centric to have warranted such a launch.

Written by Jim Wiandt