What is a Total Market ETF?
A total market ETF is an ETF that invests in the larger scope of the market. It doesn’t limit itself to only Large caps; it invests in smaller and mid cap stocks as well. Important-A Total market etf isn’t a global ETF, so you’ll still be lacking international exposure if you need that in your portfolio. Even with a Total ETF, you lack diversification into other asset classes and portions of the stock market.
Passive Investing is often characterized by buying and holding total market ETF’s or Mutual Funds.
Why should every portfolio have a Total Market Fund?
1)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. This is why people like John Bogle advocating buying the total market and holding for a long period of time. Go on over the Bogleheads forum for some real fun!
2)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. With a total market ETF, you won’t have to bother with listening to an earnings report or reading if a company grew it’s revenue this quarter. Time is money!
3)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.
4)The risks are less with a broad market ETF than individual stocks. You most likely aren’t going to wake up to your ETF collapsing 50% in one day; meanwhile, there have been plenty of stocks that have fallen 30% in one day. The 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.
Top Holdings of ITOT
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%.
Keep in mind that a great percentage of ITOT is in tech 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’s 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. I prefer this larger amount of holdings to something like SPY (which only holds the S&P 500).
3)You get a mixture of Large/Med/Small cap exposure:
77.43% is large-cap
12.51% is medium
6.44% is small caps.
There’s also less than 4% dedicated to micro-caps. Some will disagree, but I want more than large caps; I believe that the additional exposure to small caps will pay off over the long-term. I won’t 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.
Closing thoughts about ITOT
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 as well. 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 great stocks and outperform the market over the long haul.
I kind of view ITOT as a backup plan to errors.
Please leave me a comment and tell me about your experiences as a Passive investor or as a stock picker. Would love to hear from you!