The chart compares the iShares Total Stock Market ETF (ITOT), the iShares S&P 500 ETF (IVV) and the iShares Russell 1000 ETF (IWB) since ITOT's inception (the original symbol was ISI). Long story short, iShares suggest a strategy that involves ITOT and IVV (and other funds) to construct a "well diversified" portfolio. I added IWB to further make the point.
The point is the extent to which large cap domestic index funds are going to look very similar even if they track different indexes. There is not going to be any diversification benefit to owning a cap weighted total stock market fund and any sort of large cap fund. ITOT and IVV have the same top ten holdings with similar weightings of those ten. They will always look very similar to each other.
I've seen published portfolios in various places over the years and this sort of duplication occurs frequently. It can happen with other pockets of the market like foreign and fixed income.
Using broad index funds is a valid form of investing and a broad fund will capture a broad swath of the market but as I said in the above linked article owning a bunch of funds that actually capture the same thing makes for ineffective portfolio construction and could create a false sense of diversification.
5 comments:
Regarding The Street.com article; seems like you should get your own expense ratio of 1.40% down before you suggest someone else should reduce their .67% ratio.
People who live in glass houses shouldn't throw stones.
Well, 6:20, i'm not fond of the 1.4% expense ration either, but, you're comparing apples and oranges - index etf's as opposed to actively managed etf's, such as random's.
Everything's a choice, of course, an actively managed fund/etf must show it's worth the expense ratio by out-performing the indexers.
Good point Roger,
Better to combine a total US and total International etf if going the broad index route. The two have similar returns over long run, but often diverge for a year or more, providing better diversification vs an all-US approach.
From your street.com article re iShares new emerging market etf: "The logical question is why not simply reduce the fee on EEM and increase the number of holdings. I posed this question to the company and was told that some institutional clients have mandates that may lead them to one fund or the other."
I don't buy it.
Vanguard recently announced changes to their broad index benchmarks aimed at long-term cost reduction.
http://tinyurl.com/9227fpp
If they can make such a transition with minimal cap gains and expense, why can't iShares?
The real reason I think is as you say iShares has a captive audience for the more expensive etf products. Whereas Vanguard, being investor-owned, is motivated to bring costs down for everyone.
I think investors make a mistake when they believe that their wealth portfolio, invested solely in stock, approaches being diversified.
Thee are other income and wealth preservation schemes to consider, including tax reduction strategies.
As Harry Browne aptly observed, the best laid investment plans have a nasty habit of blowing up when least expected.
T
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