Quite often, I get questions from readers asking about funds and ETFs whether it's in the comment thread of an article or as a direct message. So I thought it might be useful to take these questions along with my answers and put it up as a quick post. I figure there are a lot of cases where someone has a similar question so why not use it as a learning opportunity for everybody?
As always, all names have been removed for anonymity. Do you have a question you're looking to have answered? Feel free to leave a comment wherever you happen to read one of my articles!
Today's question (lightly edited for clarity)...
Question: I have two pots of money. My dividend paying single stocks pot, and my index pot. I would like to see an article comparing ITOT and SCHB, in a simple way to comprehend (so I can understand it).
Answer: Challenge accepted!
To set the table, the iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA:ITOT) and the Schwab U.S. Broad Market ETF (NYSEARCA:SCHB) are total equity market funds. As you might imagine, they're incredibly similar funds and highly correlated with each other, so I might need to nitpick a little to find differences between the two.
The biggest difference is the universes the two funds choose to invest in. ITOT tracks the S&P Total Market Index, which is defined as "all eligible U.S. common equities". The types of securities that would NOT be eligible for inclusion in the index include ADRs, MLPs, BCDs, preferred stocks, ETFs, investment trusts and stocks that trade on the pink sheets. Like the other S&P indices, it's market cap weighted. The fund currently has more than 3,600 holdings so it's about as completed a U.S. market index as you'll find.
SCHB follows the Dow Jones U.S. Broad Stock Market Index. This index makes similar exclusions for BDCs, trusts, etc. but targets simply the 2,500 largest companies by market cap. It's worth noting that if you look at the portfolio, it includes roughly 2,000 names instead of the 2,500 you might expect. From what I've been able to glean, the fund has omitted many of the index's smallest holdings that would ultimately have little impact on the fund's performance.
So, the big difference is that ITOT targets a broader universe of equities including many of the micro-cap names that SCHB ignores.
Outside of that, the funds are almost mirror images of each other. Performance has been nearly identical as is the dividend yield of 1.7%. The expense ratio for both funds is 0.03%, among the lowest you'll find for any ETF in the entire industry. One thing to note looking at the latest available snapshots for the funds is the cash positions. ITOT has 0.2% in cash while SCHB has 0.5%. It's a minor difference but the cash drag that could be created by SCHB's larger stake in cash could be enough to create a slight performance advantage for ITOT over the long-term. Morningstar's portfolio history data suggests that these cash positions have been consistent since about 2015, so this difference could be more trend than blip.
One last consideration when deciding between the two funds could be commissions. Depending on where you have your brokerage account, either of these funds might be commission-free. ITOT carries no transaction fees at Fidelity, while SCHB is commission-free at Schwab. If you trade at one of these two spots, the commission savings may be enough to tip the scales one way or the other.
Overall, the differences are pretty minor. They are both ultra-cheap which is one of the most important factors when choosing a solid core long-term piece for your portfolio. Investors would certainly do well with either choice.
If you're interested in more dividend strategies and ETF analysis, please consider following me by clicking on the "Follow" button at the top of this article next to my name. Even if you don't, thanks for taking the time to read!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.