The Beta Investment Report | US Equity Funds (Broad) | 2.29.12

The world is awash in ETF and mutual fund research, newsletters, and commentary from every conceivable angle. But the world needs one analytical effort in this corner, albeit with a specific focus. What’s been missing is a regular update of low-cost, index fund proxies of the major asset classes. For strategic-minded investors looking to build and manage multi-asset class portfolios, the choices are overwhelming. Yes, there are many, many possibilities for combing through the list. But for those of us who want a short list that cuts to the chase, the menu of options is limited for finding good choices fast. With that in mind, today I’m launching a semi-regular series of updates on the short list of products within a given asset class, beginning with broad-minded U.S. equity funds.

In the table below is a list of index mutual funds and ETFs that are arguably the leading choices for tapping the broad U.S. stock market beta via conventional market-cap weight designs. In a future post, I’ll review funds that weight stocks by alternative rules, i.e., something other than market cap. I’ll also be looking at other asset classes as well, one by one, in the weeks and months to come. In time, I’ll peruse the choices in domestic bonds, foreign bonds, commodities, REITs, and so on–one at a time. In addition, I’ll eventually be archiving these fund lists for easy retrieval in one section on this site. Meantime, let’s start by reviewing the products that seek to replicate a broad definition of the U.S. equity market.
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The first screen for the chart above is eliminating funds with expense ratios above 20 basis points. I also ignore funds that target something other than a broad, market-cap-weighted U.S. equity index. As such, there are no S&P 500 index funds, for instance, which effectively are large-cap products. In other words, I’m looking only at single-fund solutions that satisfy a core domestic equity position that seeks out an expansive definition of stocks. For mutual funds, initial investment minimums can be no higher than $5,000 and the products must be available to the general public.
My first choice is the Vanguard Total Stock Market ETF (VTI). The combination of a low expense ratio (just 7 basis points) and deep liquidity (2 million-plus shares trade each day on average) make VTI a tough fund to beat as a core holding. The fact that it also posts the highest performance for the past three years among its competitors in the table above doesn’t hurt either.
U.S. equity allocations are likely to be among the single-biggest stake for many domestic investors over the long haul. As such, there’s a strong case for going the extra mile in reducing the drag from fees in this corner of the portfolio. The good news is that the opportunities for minimizing expenses (i.e., raising net return) are second to none in the U.S. equity space. It wasn’t all that long ago that the expense ratios of 10 basis points were available only for large institutional investors. Now, low-cost investing in the extreme is available to everyone.
A low expense ratio by itself, much less in one corner of a multi-asset class portfolio, won’t bring miracle results, of course. On that note, ETF investors should be mindful of funds with low trading volumes. And for ETFs and mutual funds in general, a perennially low asset base may be a warning sign that the product isn’t long for this world.
Meantime, strategic-minded investors will need every benefit they can muster in the years ahead. The tailwind of unusually high beta returns will be rare for the foreseeable future, in my view. One way to keep this modest outlook from biting too deeply is by squeezing costs. Every basis point saved is a basis point earned. It doesn’t mean much for one or two fund choices, but if we remain vigilant on expenses across the portfolio, the net savings will be more than trivial over time. Taking full advantage of low-cost U.S. equity beta is a substantial down payment on exploiting that advantage.