ITOT - ITOT: A Good Proxy For The Total Stock Market

2023-09-25 16:28:58 ET

Summary

• Diversification has not worked well this year, with large-cap tech stocks outperforming other sectors.
• The iShares Core S&P Total U.S. Stock Market ETF (ITOT) offers broad exposure to the entire U.S. stock market, including large-cap, mid-cap, and small-cap stocks.
• ITOT has low fees, tax efficiency, and potential for future growth, making it a compelling investment option for diversified portfolios.

Bottoms in the investment world don’t end with four-year lows, they end with 10- or 15-year lows. – By Jim Rogers

Let's face it - diversification, you can argue, hasn't worked this year if you wanted to maximize returns. It's been an incredibly concentrated "melt-up" in large-cap technology stocks. Small-caps have largely gone nowhere for some time (and continue to weaken), European equities and emerging markets have performed terribly, and bonds have continued to hemorrhage.

At some point, this will change (probably sooner than later), in which case the drag of non-large-cap technology names would reverse. When it does, funds that have more than just mega-cap names would likely outperform. That's where the iShares Core S&P Total U.S. Stock Market ETF ( ITOT ) comes into play.

What is iShares Core S&P Total U.S. Stock Market ETF (ITOT)?

The iShares Core S&P Total U.S. Stock Market ETF is a fund that offers investors access to a broad range of U.S. equities. Launched on January 20, 2004, ITOT seeks to track the investment results of the S&P Total Market Index, thereby providing exposure to the entire U.S. stock market. This broad-based exposure includes large-cap, mid-cap, and small-cap stocks, covering approximately 90% of the total domestic stock market.

ITOT’s Holdings and Components

The ITOT portfolio consists of approximately 2,817 stocks, a number that gives it a significant edge in terms of diversity. This wide array of holdings ensures that investors have a broad exposure to different sectors in the U.S. economy.

The top sectors in ITOT include Information Technology, Health Care, Financials, Consumer Discretionary, and Industrials, among others. It's not terribly different from large-cap only averages (which should make sense given market capitalization weightings). Still, the sector weightings are a bit more balanced.

ITOT’s top holdings comprise some of the leading companies in their respective industries. These include tech giants like Apple Inc. and Microsoft Corp, e-commerce behemoth Amazon Inc., graphic processing units manufacturer Nvidia Corp., and leading internet service providers Alphabet Inc.

When we look at market capitalization, it's got all sizes. This is still inherently a large-cap heavy proxy, but I find the exposure to small-caps and mid-caps to be a net positive for something you'd likely want to have exposure in when a real bull cycle begins.

Fees and Expenses

One of the key attractions of ITOT is its low expense ratio. At just 0.03%, it offers a cost-effective way for investors to gain exposure to the entire U.S. stock market. This low cost makes ITOT a viable option for investors looking for a core holding in their portfolio to seek long-term growth.

Another advantage of investing in ITOT is its tax efficiency. Over the past ten years, none of the iShares Core U.S. Equity Market ETFs, including ITOT, have paid out capital gains distributions. This tax efficiency makes ITOT an attractive investment option for those looking to minimize their tax liability.

Comparison with Peers

When compared to its peers, ITOT stands out for its broad market coverage and low cost. For instance, the average Net Expense Ratio for the iShares Core Series ETFs is 0.07%, while that of active open-end mutual funds available in the U.S. is 0.86%. This means that ITOT is less than 1/10th the cost of the typical mutual fund.

Moreover, ITOT provides a wider market exposure compared to other ETFs like the SPDR S&P 500 ETF ( SPY ), which only includes large-cap stocks. The broader diversification of ITOT less susceptible to significant declines if any of these top 10 stocks were to drop significantly (less idiosyncratic risk overall).

ITOT as a Better Representation of the Stock Market

One of the arguments in favor of ITOT is that it offers a better representation of the stock market than the S&P 500. The S&P 500, while a popular benchmark for U.S. equities, only includes large-cap stocks. On the other hand, ITOT includes a diverse range of large-cap, mid-cap, and small-cap stocks. This means that ITOT offers a more comprehensive view of the stock market, thereby providing investors with broader diversification and stock participation.

Moreover, ITOT could potentially do well in the next cycle, assuming it isn't dominated by a select number of large-cap technology stocks. This is because the fund's broad exposure ensures that its performance is not overly reliant on a single sector or a handful of stocks.

Conclusion

The iShares Core S&P Total U.S. Stock Market ETF ( ITOT ) presents a compelling investment opportunity for those seeking a more representative exposure to the U.S. stock market. With its broad market coverage, competitive performance, low fees, tax efficiency, and potential for future growth, ITOT stands out as a core holding for any diversified portfolio. I would just wait personally on initiating any longer-term positioning here until we get past this short-term period, which as I am repeatedly noting is high risk.

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