Own A Lot Of Stocks On The Cheap With This ETF

One of the great things about exchange-traded funds is that, broadly speaking, the asset class is a cost-effective avenue for accessing a broad basket of stocks. Another great thing about ETFs is that issuers of these products are constantly competing with each other on price, recognizing that lower fees are an effective asset-gathering tool.

That much was on display again in 2015, as a broad swath of well-known ETF issuers pared expenses on large, popular funds.

Fee Reductions

BlackRock, Inc. BLK's iShares unit, the world's largest ETF sponsor, was one of the big-name issuers to announce fee reductions. In November, iShares lowered fees on seven of its core ETFs, bringing some of the annual expense ratios on those funds to as low as 0.03 percent per year. That works out to be a mere $3 for every $10,000 invested.

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The $2.7 billion iShares S&P 1500 Index Fund (ETF) ITOT was one of the iShares ETFs that saw its annual expense ratio reduced to just 0.03 percent, making it one of the least expensive broad market ETFs. Last month, ITOT switched benchmarks to the S&P Total Market Index, which will bolster the ETF's exposure to micro- and small-cap stocks, according to iShares.

“The S&P Total Stock Market Index covers essentially all publicly traded U.S. stocks, including micro-caps. In contrast, the S&P 1500 Index invests in a smaller subset of large-, mid-, and small-cap stocks, screening new constituents for financial viability and profitability,” said Morningstar in a recent note.

“This results in a slight quality tilt that is noticeable among the smaller stocks in the fund’s legacy benchmark index. While the new index is more comprehensive, it does not use such screens. Despite their differences, total stock market indexes tend to be highly correlated and have had similar long-term performance.”

Congratulations, ITOT!

Last week, ITOT celebrated its twelfth anniversary, and in the 12 years the ETF has been around, it has managed to outperform the S&P 500 by nearly 700 basis points. Like the S&P 500, ITOT's two largest sector allocations are technology and financial services. The ETF devotes 37.4 percent of its combined weight to those sectors.

“As a market-cap-weighted index fund, this portfolio represents the dollar-weighted average of investors' U.S. stock holdings. Therefore, its performance should be similar to the average U.S. investor's, before fees. However, its 0.03 percent expense ratio gives it nearly a 1-percentage-point cost advantage relative to the average large-blend Morningstar Category fund. During the past 10 years, the S&P Total Stock Market Index outpaced the large-blend category by 90 basis points on an annualized basis,” said Morningstar.

ITOT's top 10 holdings, which combine for about 14 percent of the ETF's weight, include Apple Inc. AAPL, Microsoft Corporation MSFT and Exxon Mobil Corporation XOM.