What Are They?
- US Total Market and Broad ETFs cover the majority of the US equity market in a single ETF.
Why & How To Use Them
- Use of one of these ETFs allows a long term investor to cover US equities with a single ETF, perhaps as part of a diversified and rounded portfolio consisting of only 5 or so ETFs. Although the rebalancing opportunities are more limited, simple ETF portfolios are easier to manage.
- Total market ETFs are less volatile than sector ETFs or other narrow or specialty ETFs, so they tend to be less well suited to short term trading.
- Total and broad market ETFs tend to be cheap, with low expense ratios and fairly narrow bid-ask spreads.
What to Look Out For
- If you're looking to build a broad, diversified portfolio, avoid the ETFs defined by stock exchange, such as the NYSE Composite and Nasdaq Composite ETFs.
- The Vanguard Extended Market ETF (NYSEARCA:VXF) doesn't cover large cap stocks, so if you want to use a Vanguard ETF to cover all US equities, choose the Vanguard Total Stock Market ETF (NYSEARCA:VTI) instead.
- The arguments against owning ETFs defined by stock exchange are outlined in Why You Shouldn't Own DIA, SPY or QQQQ.
- An alternative to using a total market ETF is to use three ETFs covering large cap, mid cap and small cap stocks. See Core Building Blocks: Large, Mid & Small Cap US ETFs. While adding to the portfolio's complexity, using more ETFs may provide more opportunities for rebalancing. For more discussion of rebalancing, see Rebalancing Rules.
This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.