Veteran investors know that when it comes to core portfolio holdings, simpler is better. Owning too many mutual funds or exchange-traded funds doesn’t necessarily improve diversification, but it does increase fees, paperwork and the time commitment necessary to track multiple investments.
It should, therefore, come as a surprise that Vanguard Total World Stock Market ETF (NYSE:VT) isn’t even among the top 100 largest ETFs. VT provides a one-stop vehicle to invest in the full capitalization range of U.S. stocks (large, mid and small), as well as developed-market international and emerging market equities.
That means it can take the place of the four or five individual funds needed to cover the full breadth of the equity universe — and it does so with an expense ratio of just 0.22%. Nevertheless, VT only has $2.1 billion in assets, a fraction of SPDR S&P 500 ETF’s (NYSE:SPY) $118.4 billion. Maybe it’s time investors take a closer look.
What You Need to Know About VT
VT is a capitalization-weighted ETF, which means it isn’t the most aggressive fund you’ll find. More than 75% of its assets are invested in large-cap stocks, and its top holdings are similar to most broad-based ETFs: Apple (NASDAQ:AAPL), Exxon Mobil (NYSE:XOM) and Microsoft (NASDAQ:MSFT) are the top three.
However, the fund is relatively unique in that the top 10 holdings make up less than 8% of the total portfolio, and Apple has a weighting of less than 1.7%. As a result, VT has low concentration in its top holdings, and it avoids the problem of Apple dominance that many ETFs face right now.
For younger, more aggressive investors, VT’s large-cap tilt may not be ideal. However, it does ensure that the an investor can maintain proportionate exposure to the major equity categories without the need for rebalancing.
Yield investors will also find something to like here. Since more than half of the portfolio is invested outside of the U.S. (where yields are often higher), the fund offers a yield north of 3%, far better than the S&P 500 and within range of what investors can get in specialized dividend ETFs such as iShares Dow Jones Select Dividend Index Fund (NYSE:DVY).
The fund has a higher weighting in international stocks — 54% — than most investors would have if they constructed their own allocations. But other than home-market bias, is there any specific reason why U.S. investors should have most of their assets invested at home? The large international weighting — which includes a 13.6% position in the emerging markets — offers the additional benefit of currency diversification, which may be a plus at a time when the Fed is pledged to open-ended quantitative easing.
The fund also offers a high level of sector diversification, which prevents investors from unwittingly making sector “bets” with their core holdings. The largest sector weighting is financials at just 16.4%, while seven of the remaining 10 sectors check in with weightings in the 7% to 12.5% range. This broad level of exposure is essential for a core holding.
Investors who do additional research into this fund will notice that it hasn’t delivered exceptional performance compared to some of the bigger-name ETFs. Since the post-crisis low of March 9, 2009, the fund has generated an average annual return of 23%. Investors would have seen larger gains in SPDR S&P 500 ETF (+25.5%), iShares Russell 2000 Index (NYSE:IWM) (28.9%) or iShares MSCI Emerging Markets Index Fund (NYSE:EEM) (23.4%) during this time.
The cause of the shortfall is, of course, the large weighting in developed-market international equities, where the European debt crisis and the continued problems in Japan have weighed heavily on performance.
This underperformance isn’t necessarily a negative, however, since it indicates that the fund has a good-size position in stocks that haven’t fully participated in the rally. It’s quite possible that these stocks could also suffer less downside if the market encounters some volatility in the months ahead — and they may be due to play catch-up if it doesn’t.
The Bottom Line
The Vanguard Total World Stock Market ETF isn’t exciting, and it certainly isn’t going to show up on anyone’s “Top 10 ETFs for 2013” list. But with regard to a core, long-term holding, maybe that’s exactly what investors should be looking for.