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ETF News And Commentary

Arguably, most investors put too much of their resources into large cap U.S. stocks. After all, companies in this segment are among the biggest and most well-known in the world and include firms that dominate their industries and seem unlikely to be wiped from the world stage anytime soon.

For this reason, large caps are probably safer than their small and mid cap cousins which are often overshadowed in many portfolios. This is despite research that shows—although small stocks are more volatile—that these pint sized securities have outperformed their large cap counterparts by a pretty wide margin over a long time period (read Track Market Gurus with these ETFs).

In fact, a recent study showed that small caps beat out large caps by 200 basis points a year, on average since 1926. With results like these over such a lengthy time frame, it may not be a bad idea for large cap investors to consider adding a tad more to their small and mid cap holdings.

Unfortunately, stock selection in both the mid cap and small cap segments are inherently more risky than in the large cap world. That is because much less research is done on these small securities while their economic moats are often less favorable than those that have established a global presence in a given industry. Furthermore, mid caps, and to a greater extent small caps, have higher betas so when markets are sliding they are bound to be more hurt than their peers. 

With this backdrop, a broad ETF approach could be the way to go in order to get all of the benefits of the small and mid caps while at a lower risk level. For investors who find this technique intriguing, a look to any of the U.S. ‘completion ETFs’ could be a great idea (read The Truth about Low Volume ETFs).

That is because these ETFs allocate assets to both small and mid caps, helping to round out portfolios that are too heavily concentrated in large cap securities. Furthermore, unlike total market ETFs, they prevent double exposure to big companies, allowing investors to achieve a more well-rounded portfolio.

While any of the following could easily accomplish this task and have many similarities, we have highlighted some of the key differences from these completion ETFs for investors looking to obtain a more diversified portfolio across a variety of market cap levels while still focusing in on the American market:

Vanguard Extended Market Index Fund (VXF - ETF report)

For the cheapest choice in the space, investors should look to VXF for their small and mid cap exposure. This fund tracks the S&P Completion Index which looks to match the performance of virtually all U.S. stocks outside of the S&P 500 benchmark.

The ETF does a great job of spreading exposure across a variety of securities as only 4.6% of assets are in the top ten holdings. From a sector look, financials take the top spot, while consumer discretionary is second and industrials and technology round out the top four (read Three Tech ETFs Rocked by Google’s Earnings Miss).

The product is actually the cheapest in the space as well, coming in at 0.14% a year in fees. Furthermore, the product’s high volume and AUM suggest a tight bid ask spread, meaning that total costs are unlikely to be too much higher than this stated figure for virtually all stripes of investors.

Wilshire 4500 Completion ETF

For another look at the small and mid cap market, investors have WXSP from Guggenheim. This product tracks the Wilshire 4500 Completion Index which is a benchmark that consists of nearly 3,470 American stocks.

The fund, however, tracks a relatively small subset, holding 1,480 companies in total, with an average market cap just over $4 billion. In terms of holdings, no one company makes up more than 1% of assets, while financials, consumer discretionary, and technology take the top three spots from a sector look (see the Guide to Consumer Staples ETFs).

Expenses for this product rival VXF, coming in at 0.18% a year in fees, although bid ask spreads are likely to be far higher. Still, the product represents a solid choice for investors that is also well balanced among the various styles as well (growth and value).

PowerShares FTSE RAFI 1500 Small-Mid Portfolio (PRFZ - ETF report)

The last ETF on the list uses the RAFI system to weight small and mid cap stocks for inclusion in a portfolio. The ETF tracks the FTSE RAFI US 1500 Small-Mid Index, weighting stocks on factors like book value, cash flow, sales, and dividends instead of the more ‘traditional’ market cap system.

The product is pretty well spread out as just 0.3% is in the top holding, giving the fund incredible diversification. From a sector perspective, financials, consumer discretionary, and technology take the top three spots (see Three ETFs with Incredible Diversification).

Expenses on this fund are a little higher than what some of the other products are seeing, coming in just under 40 basis points a year. However, AUM is relatively high at close to half a billion, so bid ask spreads should be relatively tight for this fund.

 

 

VXF

WXSP

PRFZ

Total Holdings

1,855

1,480

1,465

Mid Caps

39%

36%

8%

Expense Ratio

0.14%

0.18%

0.39%

AUM

$1.4 bil

$6.5 mil

$450 mil

Annual Yield

0.98%

0.80%

1.16%

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