To track a market like U.S. stocks, should an investor use a total-market exchange traded fund (ETF) like the Vanguard Total Stock Market ETF ( VTI), or one like the popular Standard & Poor’s 500 Index Depository Receipts Fund ( SPY)?
Im leaning toward the total-market solution. One argument in favor is that it is more diversified. The VTI tracks the MSCI US Broad Market Index, which represents 99.5% of the total market capitalization ofU.S. stocks traded on the NYSE, AMEX and NASDAQ exchanges. The SPY tracks about 25% less, last I checked.
A second argument in favour of total-market indexes, which Jeremy Siegels book, The Future for Investors(2005), brings to my attention, is that investors dont have to worry about speculators taking advantage of index additions and deletions. With ETFs tracking the S&P 500, hedge funds and other opportunists know what stocks the funds need to buy or sell to stay current with changes to the index basket, so they profit by buying the additions before the fund does — pushing upprices and making it more expensive for the fund to acquire the stocks. This could be seen as a hidden cost that lessens some of the advantage of index investing. On the other hand, total-market indexes dont have the same problem with additions and deletions to the index.
One caveat, perhaps, is that the total-market ETF does not allow the investor to determine their own allocations across small-, mid- and large-cap stocks. Then again, they won’t have to rebalance across the three groups, which incurs costs.