An exchange traded fund that tracks the S&P 500 provides a good entry point to large capitalization stock exposure. However, if you want to round out your portfolio, there are some other ETFs that could help supplement your large-cap positions.
For instance, the Vanguard Extended Market Index ETF (NYSEArca: VXF) acts as a good pair to an S&P 500 index fund, writes Morningstar analyst Michael Rawson.
“This fund tracks the S&P Completion Index, which holds virtually every liquid U.S. stock outside of those in the S&P 500 Index,” Rawson said.
The VXF ETF tracks non-S&P 500 companies, like Facebook (NasdaqGS: FB), Las Vegas Sands (NYSE: LVS) and other companies that don’t meet S&P 500’s 50% public float requirement, domicile requirement and recent initial public offerings 12 month seasoning requirement.
Looking at market capitalization, the S&P 500 leans toward mega-cap stocks, whereas the S&P Completion Index includes a majority stake in mid- and small-cap stocks. [Mid-Cap ETFs in the Groove]
“The result is that the Completion Index’s portfolio behaves very similarly to a mid-cap index fund,” Rawson added.
Consequently, investors can pair a S&P 500 ETF with something like VXF to gain total U.S. market exposure. Rawson suggested something like 78% in S&P 500 stocks and 22% in an ETF like VXF.
However, investors can also take on one ETF, such as the Vanguard Total Stock Market ETF (NYSEArca: VTI) or the iShares Core S&P Total US Stock Market ETF (NYSEArca: ITOT), to gain total U.S. stock exposure.
“Those already holding an S&P 500 fund looking to round out their portfolio with mid- and small-cap stocks are faced with a choice: either add a fund tracking a completion index such as this, resulting in two positions, or sell the S&P 500 fund and allocate the proceeds to a total market fund, resulting in just one holding,” Rawson said.
Investors, though, would probably be better off sticking to the two-fund style if selling the S&P 500 ETF results in a capital gains hit.
For more information on large-cap funds, visit our large-cap category.
Max Chen contributed to this article.