Instead of compiling market segments and sectors into a comprehensive equities portfolio, investors should utilize broad index-based exchange traded fund as an efficient way to capture broad market exposure.
“For taxable accounts, a broad index fund is a better option for investors building a complete allocation to U.S. equities compared with using separate size segment funds,” according to Morningstar analyst Michale Rawson. “Because a broad fund holds both large- and small-cap stocks, it is not forced to buy or sell as stocks migrate into a different market-cap range.”
Through a total market ETF, investors can gain access to thousands of stocks across various market segments and categories. For instance, the Vanguard Total World Stock ETF (NYSEArca: VT), iShares Russell 3000 ETF (NYSEArca: IWV), Schwab U.S. Broad Market ETF (NYSEArca: SCHB) and SPDR Russell 3000 ETF (NYSEArca: THRK) all provide broad stock exposure across all market capitalizations.
VT covers 6,550 stock components and comes with a 0.18% expense ratio. IWV tracks 3,024 stocks and has a 0.20% expense ratio. SCHB includes 2,026 holdings and has a 0.04% expense ratio. THRK follows 2,520 components and has a 0.10% expense ratio. [Build a Dirt-Cheap Portfolio With These ETFs]
Rawson points out that these broad index funds are an efficient way to access the markets. Specifically, if a small-capitalization stock were to appreciates in price, a small-cap-specific fund would have to sell it while a large-cap-specific fund would have to purchase the stock. However, the same stock would just fluctuate up or down in size but stay in the same broad index fund.