U.S. Markets open in 6 hrs 11 mins

How to Round Out a Stock ETF Portfolio’s Market-Cap Exposure


An exchange traded fund that tracks the S&P 500 provides a good entry point to large capitalization stock exposure. However, if you want to round out your portfolio, there are some other ETFs that could help supplement your large-cap positions.

For instance, the Vanguard Extended Market Index ETF (VXF) acts as a good pair to an S&P 500 index fund, writes Morningstar analyst Michael Rawson.

“This fund tracks the S&P Completion Index, which holds virtually every liquid U.S. stock outside of those in the S&P 500 Index,” Rawson said.

The VXF ETF tracks non-S&P 500 companies, like Facebook (FB), Las Vegas Sands (LVS) and other companies that don’t meet S&P 500′s 50% public float requirement, domicile requirement and recent initial public offerings 12 month seasoning requirement.

Looking at market capitalization, the S&P 500 leans toward mega-cap stocks, whereas the S&P Completion Index includes a majority stake in mid- and small-cap stocks. [Mid-Cap ETFs in the Groove]

“The result is that the Completion Index’s portfolio behaves very similarly to a mid-cap index fund,” Rawson added.

Consequently, investors can pair a S&P 500 ETF with something like VXF to gain total U.S. market exposure. Rawson suggested something like 78% in S&P 500 stocks and 22% in an ETF like VXF.

However, investors can also take on one ETF, such as the Vanguard Total Stock Market ETF (VTI) or the iShares Core S&P Total US Stock Market ETF (ITOT) , to gain total U.S. stock exposure.

“Those already holding an S&P 500 fund looking to round out their portfolio with mid- and small-cap stocks are faced with a choice: either add a fund tracking a completion index such as this, resulting in two positions, or sell the S&P 500 fund and allocate the proceeds to a total market fund, resulting in just one holding,” Rawson said.

Investors, though, would probably be better off sticking to the two-fund style if selling the S&P 500 ETF results in a capital gains hit.

For more information on large-cap funds, visit our large-cap category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.