August 24, 2014

Best Large Cap ETFs

U.S. large cap stock index funds are often the core portfolio holdings for many investors. They're usually cheap and offer exposure to the majority of investable market in the U.S. The good news is large cap ETFs are pretty similar to one another. For the most part, it doesn't matter which large cap index your particular fund tracks. In the battle of large cap growth vs. large cap value, each has had stretches of outperformance, but I don't see any evidence that one style is particularly better than the other (especially in the long-run). For that reason, I prefer blend ETFs in the large cap space. Blend funds are about as close to passive investing as you can get and reduce your risk of too much portfolio overlap by purchasing too many different funds that own the same stocks. Take, for example, the growth and value variations of the S&P 500 SPDR, SPYG and SPVV, contain 343 and 339 stocks respectively. There an overlap of 179 equities between the two.

With not much to choose from between large blend ETFs, I tend to focus on expenses, liquidity, and assets. There are various weighting options, including the Guggenheim S&P 500 Equal Weight ETF (RSP) or the RevenueShares Large Cap Fund (RWL) but I'm focusing here entirely on cap weighted funds for two reasons. First, alternative weighting is less of a passive strategy - it assumes a portfolio weighting other than by market cap will beat the market. Second, investors can achieve nearly identical performance (to equal weight anyway) with lower cost mid cap funds. I've also ignored large cap indexes like the Dow Jones Industrial Average, which is price weighted, ETFs that only track the mega cap slice of the broader large cap market, or others that take a more active approach, including the Global X Guru Index.

Sticking with broad blend large cap indexes, I've come up with the nine funds below and sorted them by assets. SPY, the oldest and largest ETF, comes out on top in terms of size. However, six funds in the list have assets $3 billion and up along with over 100,000 shares/day in average trading volume. SPY conspicuously isn't offered commission-free by any brokers, but the next five largest (IVV, VOO, IWB, VV, and SCHX) are.

Comparison of US Large Cap Index ETFs:
Comparison chart of US Large Cap ETFs: SPY, IVV, VOO, IWB, VV, SCHX, JKD, EUSA, ONEK


In terms of pure cost, large cap ETFs tend to have the lowest expense ratios around. A large ER difference can significantly add up over time, particularly when funds and/or asset managers are charging in excess of 1% each year. But across the board, these expenses are spectacularly low. Schwab wins out on the absolute cheapest US large cap ETF, with the lowest expense ratio of just 0.04%! Both of Vanguard's offerings (VOO and VV, tracking the S&P 500 and CRSP US Large Cap Index respectively) are fractionally more expense than SCHX, along with the SPY SPDR and iShares Core S&P 500 ETF that all of them would make fine building blocks for most portfolios.

The iShares Russell 1000 EF (IWB) is on the more expensive side in this group, so an investor would need to determine if the small amount of additional exposure into the mid cap space is worth it in comparison to the others that hold anywhere up to around 750 stocks. Ultimately, performance for all of these ETFs is very similar, regardless of the underlying index - over the past year, there's been a less than 2% difference in total returns between them. Looking back further, over the past 3+ years, again you'd be looking at very similar performance within 2-3% for most.

The iShares Morningstar Large-Cap ETF (JKD) is the one standout that outperformed the rest to the tune of about 4-7% over that time. The Morningstar Large-Cap Index's methodology seems like the largest departure from the rest. Rather than holding a blend of growth and value stocks, this index views "core" as a distinct strategy that doesn't include equities that exhibit strong growth or value tendencies. It's more of a middle-of-the-road approach yet to me seems to be closer to an active strategy than the others. As such, JKD has only 98 holdings. Whether or not this outperformance continues is anyone's guess. Note, it is among the bottom three in the above list in regard to assets and trading volume.

Each investor will of course need to decide which attribute is most important to him or her. All else being equal, I lean toward the low expenses from Vanguard and Schwab offerings and the ability to buy commission-free from Vanguard, Schwab, and TD Ameritrade.

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