I think every portfolio should begin with a TOTAL MARKET ETF OR MUTUAL FUND. Why? It’s incredibly difficult to outperform the market, especially on longer time frames. The best way to ensure you are getting the market’s return is to own that market.
A broad ETF allows one to own companies such as Apple, Microsoft, Amazon, and JP Morgan fairly cheap, certainly A LOT cheaper than if you wanted to buy shares of each company individually.
The top Holdings of ITOT are as follows:
Microsoft 4.34%, Apple 4%, AMZN 2.68%, Facebook 1.55%, Google 1.36%, Berkshire Hathaway 1.33%, JPMorgan 1.3%, Johnson and Johnson 1.2%, Visa 1.07%.
Another great reason to own a total market ETF is that it saves you time in the long run. The amount of time required to buy and hold an ETF like ITOT is much less than researching and purchasing individual stocks. Regardless of how easy a portfolio of dividend stocks may seem, it IS, in fact, more time-consuming. You won’t have to bother with listening to an earnings report or reading if a company grew it’s revenue this quarter.
Lastly, your price movement volatility is less with the total market ETF than with individual stocks. You won’t have to endure specific company or sector risks like you will with individual stocks.
Why did I choose ITOT as the meat and potatoes of my portfolio?
1)An incredible low expense ratio of 0.03%. It doesn’t cost much to hold this over the course of many years. The expense ratio is, of course, low because it is not an actively managed fund, it’s a PASSIVE vehicle of investing.
2)Very large diversification; 3634 total holdings versus 1599 for VTI or 2397 for SCHB. So, you are getting a HUGE percentage of the US Stock market with this ETF.
3)You get a mixture of Large/Med/Small cap exposure. 77.43% is large-cap, 12.51% is medium and 6.44% is small caps. There is also less than 4% dedicated to micro-caps as well. Some will disagree but I want more than just the S&P 500 or large caps; I believe that the additional exposure to small caps will pay off over the long-term. Not to say past determines the future; however, there are ten year stretches where medium or small-caps outperform large caps.
4)ITOT is extremely tax efficient. Since its an ETF, you won’t see the typical capital gain distributions like you would a mutual fund. The only time you’ll pay taxes is on the quarterly distributions and if you sell. If you buy with the intention of holding a long time, then your taxes are slim year to year.
5)The distribution isn’t too bad. 1.88% currently versus 1.77% for VTI and 1.80% for SCHB. So, out of the 3 main large ETF’s the yield is more for ITOT than the others. This distribution is quarterly as well.
There are plenty of options when it comes to Total Market or broad market ETF’s. ITOT, VTI, and SCHB are all nice choices when it comes to trying to own a large portion of the market, I think it’s hard to go wrong with any of them. However, for my personal investing purposes I’m a big fan of ITOT.
Lastly, don’t forget, there is nothing that says you can’t both index invest and dividend invest or growth invest. Figure out your goals and the best way to reach them. For me, increasing my net worth is my big goal and a plain Jane Total Market ETF helps me reach that goal. While I do enjoy researching and buying stocks, I don’t want to depend on the small possibility I’ll choose all great stocks and outperform or perform close the market over the long haul.