Exchange traded funds allow investors to easily access broad market segments, without worrying too much about costs cutting into overall returns.
For instance, the Vanguard Total Stock Market ETF (NYSEArca: VTI), with a 0.05% expense ratio, and the Schwab U.S. Broad Market ETF (NYSEArca: SCHB), with a 0.04% expense ratio, are among the cheapest U.S.-listed ETFs that provide exposure to nearly the entire U.S. stock market. [Build a Dirt-Cheap Portfolio With These ETFs]
“The decision between these two very broad, extremely low-cost funds boils down to a mix of hair-splitting and personal preferences and circumstances,” Morningstar Director of Global ETF Research Ben Johnson said. “This is a high-quality problem for investors to have.”
Specifically, VTI tracks the CRSP U.S. Total Market Index, which includes almost every liquid U.S. stock on the market. The ETF covers 3,818 components. [The Total Cost of Investing in ETFs]
SCHB, on the other hand, follows the Dow Jones U.S. Broad Stock Market Index, which tracks about 95% of the U.S. equity market, including 2,002 companies. However, SCHB does not include exposure to micro-caps, which VTI does.
“This won’t necessarily move the needle on performance over long periods of time, but it makes VTI’s bogy more truly representative of the U.S. stock market,” Johnson added.
Looking at their performances, both SCHB and VTI have generated an average annualized return of 17.1%. Additionally, both funds have lagged their respective indices by an amount less than fees since inception – most ETFs may show some tracking errors due to expenses, so a lower fee typically helps ETFs more closely follow their benchmarks.
VTI, though, is more actively traded and is the bigger fund. The ETF has $57.1 billion in assets under management and shows a 2.6 million average daily volume. SCHB, on the other hand has $5.1 billion in assets and has a 471,000 average daily volume.
No matter which ETF investors ultimately choose, the two broad stock ETFs offer long-term investors a cheap and solid core investment position. Either stock ETF can serve as a good foundation to a diversified investment portfolio.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.