The ever-growing ETF universe continues to allow investors to slice and dice an ETF portfolio to get more and more nuanced exposure.
This could be in the form of specific industry exposure, alternative- beta (“smart beta”) exposure, and so on and so on. On the flipside, there are also possibilities for investors to obtain broad market exposure via a singular ETF. And obviously, there are numerous combinations in-between.
As an example, what if an investor has an existing S&P 500 exposure (via ETF, index mutual fund, individual stocks, etc.) and is looking to diversify into a broader exposure. This investor could easily just purchase a broad market ETF in conjunction with the existing S&P portfolio. However, because of the market-cap weighted nature of most broad market ETFs, that investor may end up doubling up on the S&P 500 exposure and still would not have truly broad market exposure. While the investor could then utilize the numerous smaller-cap ETFs to round out the portfolio, another option could be the use of a Completion ETF.
A Completion ETF is a broad market ETF that excludes stocks in the S&P 500. So the ETFs can be used in conjunction with S&P 500 exposure to get broad market exposure. There are currently two different completion ETFs in the market (AUM in millions)
While similar in construction in that both exclude S&P 500 exposure, there are some slight differences, mainly stemming from the underlying index (outside of the broader S&P versus Russell methodologies).
The S&P index uses a ‘base’ index of the S&P Total Market Index, which consists of approximately 3800 stocks. Conversely, the Russell index uses the Russell 3000 as a base index. As such, the S&P version (VXF) will include more exposure to small and micro-cap names while the Russell version will limit exposure since the index starts with the 3000 names only. The difference can be seen by the number of holdings referenced in the table above.
(Side note – to capture a succinct micro-cap exposure, this is available via iShares Russell Microcap (IWC), which includes the smallest 1000 names in the Russell 2000 plus the next 1000 names by market cap.)
Here is an alternate view of the breakdown on both the S&P and Russell side.
On the S&P side, the S&P TMI is made up of approximately 3800 stocks. Outside of owning a TMI index ETF, if an investor were to try to recreate the exposure, they would start by using the S&P 500 (large cap), S&P 400 (mid cap) and S&P 600 (small cap). However, from that point, there is not an ETF that would capture exposure from the remaining ~2300 stocks. Therefore, instead of using the S&P 400 and S&P 600, an investor could use the Completion ETF (plus the S&P 500) to capture broad exposure.
On the Russell side, it is a bit different in that an investor could utilize a Russell 3000 ETF to capture broad exposure (putting aside the micro-cap differences as noted above). This exposure can also be recreated using a simple combination of a Russell 1000 and Russell 2000 ETF. To get a more large/mid/small breakdown, an investor could use a large-cap name in combination with a Russell Midcap (bottom 800 of the Russell 1000), and the Russell 2000. However, there is not an ETF that focuses solely on the Russell Top 200 (to fill in the difference between the Russell 1000 and Russell Midcap). Therefore, if an investor would instead use an S&P 500 name in lieu of a Russell Top 200, they would be doubling up exposure on approximately 300 names (the top of the Russell Midcap).
Both of these examples bring me back to the original statement in that if an investor wants to supplement an existing S&P 500 exposure to capture broad market exposure, instead of slicing and dicing their way through it, a completion ETF could be an option. Additionally, as noted in the table, it is a relatively inexpensive option, as both ETFs cost only 10bp, which may be cheaper than trying to recreate the exposure depending on what ETFs are utilized to do so.