Total Market Still the Benchmark to Beat

Will McClatchy,
January 23, 2011

Total market ETFs are a one-stop solution for beginning investors as well as the default benchmark for sophisticated investors. Everyone should have a basic understanding of total market and review its performance occasionally. Recent years have given food for thought.The classic question for total market equities is how easy they are to beat by overweighting with sub-indexes of size, value, industry sector, etc. At first glance it might seem easy to beat an index which includes every single company in its universe. Surely there are obvious dogs, right? In recent years, however, most equity sub-indexes rose and fell dramatically together. While some protection can always be gained (or lost) by picking sub-indexes, it was largely a distraction this time around. The most important opportunity was rotating entirely out of equities and then back at sensible times. Even without calling peaks and valleys accurately, much maligned market timing did particularly well during this cycle (but has been difficult in others). It illustrates one of chief benefits of total market ETFs. They allow focus on big questions of asset allocation which are so fundamental to success at key points but are often taken for granted.Most investors buy and hold total market ETFs, and rightly so because they do not have the training, time, or inclination to constantly pick sub-indexes. Many economists argue that trading of publicly traded stocks is so competitive that trying to beat the market raises risk in exchange for little if any reward. Clearly for those who stayed the course (not those who panicked and sold when down) in total market US equities but also in total market foreign equities, 2010 brought some vindication with prices returning nearly to all-time highs: For American investors the total market is commonly defined as the universe of publicly traded US stocks weighted by capitalization. But it is useful to consider total US bond market ETFs in this discussion, as well as ETFs which track foreign equities. The philosophy and focus on simple asset allocations are the same.These ETFs follow every security in their universe, which is not quite as daunting as it might seem. Most ETFs use a sampling methodology to avoid having to buy small, illiquid stocks. And most ETFs can buy or sell index futures to handle large money inflows and outflows.Cost conscious investors love total market funds. Annual expense ratios tend to be low, but that is just the visible part of savings. Universal indexes have one boundary at the bottom where small amounts of tiny companies come and go, so turnover costs are dampened. Arbitrageurs have almost no opportunity to skim value from index component additions or deletions as they do with an index such as the S&P 500 where listing and delisting of giant firms can be poached.Among total market and associated ETFs are:Basic low-cost US

  • Vanguard Total Stock Market ETF (AMEX:VTI; annual fees: 0.07%
  • SPDR Dow Jones Wilshire Total Market ETF (NYSEArca:TMW - News); annual fees: 0.2%
  • iShares Russell 3000 ETF (NYSEArca:IWV - News); annual fees: 0.2%

VTI uses the MSCI US Broad Market Index with about 3,800 stocks, while TMW follows the Wilshire 5000 which is one of the most comprehensive index available with more than 5,000 US stocks, and IWV tracks the Russell 3,000 with over 3,000 US stocks. The broader indexes include more small companies and therefore tend to have improved diversification, lower average market cap, higher average growth rates, and higher risk, all in modest amounts.Global/InternationalVanguard Total World Stock ETF (NYSEArca:VT - News), annual fees: 0.25%; tracks the FTSE All-World Index of about 2,900 stocks in 47 countries, including about 44% holdings in the USSPDR MSCI ACWI ex-US ETF (NYSEArca:CWI - News); annual fees: 0.35%; targets the world's publicly traded companies outside the US and thus complementary to a US total market fundSPDR S&P World ex-US ETF (NYSEArca:GWL - News); annual fees: 0.35%; very similar to CWI, this global (except US) total stock fund sports slightly higher average market capsFundamentalELEMENTS Benjamin Graham Total Market Value Total Return ETN (NYSEArca:BVT - News), annual fees: 0.75%; selects 100 firms using valuation techniques developed by Benjamin Graham, the father of fundamental investing.StyleiShares Russell 3000 Growth ETF (NYSEArca:IWZ - News), annual fees: 0.25%; carves off about 1,800 stocks in the Russell 3000 which have higher projected growth and higher price-to-book ratios.iShares Russell 3000 Value ETF (NYSEArca:IWW - News), annual fees: 0.25%; is the complementary inverse of IWZBalancedPowerShares RiverFront Tactical Growth & Income Portfolio (AMEX:PCA - News), is a fund of fund which contains numerous PowerShares, iShares and Vanguard ETFs resulting in a traditional growth and income portfolio of 50% stocks and 50% bonds with a majority of US-based assets. A sister fund, PowerShares RiverFront Tactical Balanced Growth Portfolio (AMEX:PAO - News), allocates 80% to equities for a more aggressive stance. While both charge 0.25% for their services, the underlying ETFs they buy also charge. The total expense ratio to the investor depends on holdings and has been around 0.65%. The RiverFront indexes essentially act like a private money manager.Claymore U.S.-1-The Capital Markets ETF (AMEX:UEM - News), annual fees: 0.55%, contains exposure to 2,000 US stocks and fixed income of every stripe, including government and quasi-government bonds like Fannie Mae.LifecycleXShares offers a line of total stock and bond funds which change over time. These are the ultimate buy, hold and forget funds. They start with relatively high US equity allocations and glide down to 10% on their target date listed in their title, and then they increase their equity allocation until it reaches 33% where it stays put. TDX had a target date of 2007 and thus is moving up to its final 33% equity allocation.

  • XShares TDX Independence 2010 ETF; (NYSEArca:TDD - News); annual fees 0.73%
  • XShares TDX Independence 2020 ETF; (NYSEArca:TDH - News); annual fees 0.73%
  • XShares TDX Independence 2030 ETF; (NYSEArca:TDN - News); annual fees 0.73%
  • XShares TDX Independence 2040 ETF; (NYSEArca:TDV - News); annual fees 0.73%
  • XShares TDX Independence In-Target ETF; (NYSEArca:TDX - News); annual fees 0.73%

Co-founder of, author of two books on investing, and founder of, Will has been writing on indexing issues for 8 years. He holds an MBA from the University of Texas at Austin.