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Fund Spotlight Series – iShares “Core” ETFs

The price war between ETF companies may be hurting their bottom line, but for individual investors investing has never been cheaper. Today we spotlight some of iShares “core” ETFs that have recently become even cheaper and compare them to Vanguard’s counterparts.

There are several basic, fundamental funds that should make up an investor’s “core” portfolio. A broad based stock fund, bond fund and a fund to give some international exposure are some basic essentials that ensure an investor is diversified. In response to Vanguard’s growing market share in ETFs that give investors just that, iShares (run by Blackrock corporation – one of the biggest in the ETF industry) has answered with significantly lowering the expense ratios on some of their existing “core” funds along with creating new funds to combat Vanguard’s dominance.

 

Only a decade ago, it was nearly impossible for an individual investor to be broadly diversified in domestic stocks, international stocks and all types of bonds without paying well over 1% of their assets every year in expense ratios. However, as low cost passive index investing has become more popular and competition among fund companies greater, expense ratios have come down significantly. Today, as these funds below show, investors can typically find funds with expense ratios of under 0.1%, saving a $100,000 portfolio nearly $1,000 a year.

 

3 of the basic ETFs that make up Blackrock’s “core” set of funds that provide investors exposure to stocks, bonds and international markets are discussed below:

 

First up, iShares core stock fund.

ITOT – iShares Core S&P Total U.S. Stock Market ETF

Quick Facts:

 

–         1.9% Dividend yield

–         Quarterly dividend distributions

–         Tracks the S&P Composite 1500 Index

–         0.07% Expense Ratio

 

Prospectus: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/is_p_itot.pdf

 

ITOT is a total stock market fund containing 1502 companies. Total stock funds will differ from other stock funds in that they typically own companies of a wide range of market cap. Many ETFs may follow indexes such as the S&P 500 which is made up of large cap stocks; others may follow a small or mid-cap stock index. But total market funds typically contain them all.

 

ITOT’s largest holdings appear similar to any S&P 500 index fund, dominated by Apple, Exxon, IBM and the other large cap $100+ billion giants. But the rest of the fund’s holdings represent a much broader investment into the American economy than the S&P 500. ITOT holding’s also include small cap companies with market caps as low as $50 million.

 

ITOT’s counterpart at Vanguard is ticker symbol VTI. VTI has an expense ratio just slightly lower at 0.06%, but the big difference comes from increase in companies that make up the holdings of fund. Where iShare’s total market fund consists of 1502 companies, Vanguard’s is made up of over 3200. VTI also sports a slightly higher dividend yield at 2.08%. The two funds have identical top 10 holdings; the difference comes from the 1700 extra companies within Vanguard’s fund.

 

For a little better side by side comparison:

 

Equity characteristics    

 

Vanguard Total Stock Market ETF

iShares Core S&P Total U.S. Stock Market

Number of stocks 3258 1500
Median market cap $34.8 billion $39.3 billion
Price/earnings ratio 16.2x 15.2x
Price/book ratio 2.1x 2.1x
Return on equity 17.70%
Earnings growth rate 10.10% 10.20%
Foreign holdings 0.10% 0.80%
Turnover rate 5.20% 5.00%
Average annual total return—after taxes on distributions

 

Vanguard Total Stock Market ETF

iShares Core S&P Total U.S. Stock Market

 

Market price Market price
1-year

29.92%

29.42%

3-year

13.10%

12.84%

5-year

1.23%

0.92%

10-year

8.44%

Since inception

3.47%

4.56%

Inception date

5/24/2001

1/20/2004

1-, 3-, 5-, 10-year as-of date

9/30/2012

9/30/2012

 

Vanguard’s larger number of holdings does not significantly change the return of the fund compared to ITOT. This is because the additional 1700 companies in Vanguard’s fund receive only a fraction of a percent of the fund’s investments. Are investors more diversified in Vanguard’s fund? Technically yes, but many companies within the fund make up less than 0.001% of the fund’s $201 billion in assets under management, hardly enough to significantly affect the funds performance, as shown below.

 

A comparison of the funds performances over the last decade:

 

 

 

Almost identical.

 

The exposure to small cap companies has helped the performance of the funds as of late. Smaller cap companies have been outperforming, and have boosted the returns of the funds compared to the S&P 500.

 

Just another example of how diversification can actually improve the returns for an investor.

 

The decision of which total market stock fund to choose relies mostly on your broker. If you have Vanguard, VTI will trade commission free which is a big plus. If you have other brokers, it is really a toss up as these fund’s returns have been very similar and offer similar expense ratios and dividends.

 

 

 

 

Next up, iShare’s new international ETF

 

IXUS – iShares Core MSCI Total International Stock ETF

Quick Facts:

 

–     Semi-annual dividend distributions*

–         Tracks the MSCI ACWI ex USA Investable Market Index

–         0.16% Expense Ratio

 

*Per the prospectus, IXUS is scheduled to have semi-annual dividends. IXUS launched 8/26/2012 and has not yet paid any dividends at time of writing.

 

Prospectus: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/is_p_ixus.pdf

 

iShares is also offering many new funds to try to gain market share from Vanguard, one of these new funds is IXUS. IXUS holds over 3300 non-U.S. companies, giving investors an incredibly easy way to diversify their international holdings.

 

The downside to this fund is its liquidity. IXUS only trades about 2,000 shares a day, well below what I would be comfortable with, but that may not deter other investors. The low liquidity means possibly a larger bid-ask spread on shares of the ETF, which means increased costs for investors. The low liquidity may also mean your trades do not execute right away due to the limited number of or traders are actively buying or selling the ETF.

 

The fund’s liquidity is likely to improve in the future as the fund gets more established. Check and verify the latest volume numbers before deciding whether or not to invest in this fund.

 

Vanguard also offers a similar fund, VXUS. Vanguard’s option boasts a slightly higher expense ratio of 0.18%, but consists of over 6000 companies compared to IXUS’s 3300+.

 

With this fund being brand new, there is not a lot of data out yet on how it will perform or what dividend yield will be. Keep an eye on this fund.

 

 

 

 

And lastly, iShares bond fund.

AGG – iShares Core Total U.S. Bond Market ETF

 Quick Facts:

–         1.62% Dividend yield

–         Monthly dividend distributions

–         Tracks the Barclays U.S. Aggregate Bond Index

–         0.08% Expense Ratio

–         Commission free for Fidelity and TD Ameritrade customers

 

Prospectus: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/is_p_agg.pdf

 

 

The last of iShare’s basic “core” funds is their total bond fund. Total bond funds own it all; U.S treasuries, mortgage bonds, corporate bonds, municipal bonds and more. In fact, AGG is made up of more than 1600 individual bonds, giving investors broad diversification in their bond holdings. All for an expense ratio of only 0.08%, which is a great deal for individual investors who otherwise would have a very hard time affordably diversifying their bond holdings. Individual bonds typically require high minimums of $10,000+ (except treasuries), making diversifying nearly impossible for beginning investors. This fund makes it easy.

 

Most bond funds offer monthly dividend payments instead of quarterly which is common place in stock funds. For investors looking for their investments to provide a source of income, bond funds such as AGG provide a much needed check each month.

 

And of course Vanguard offers investors another choice, ticker symbol BND**. BND has an expense ratio of 0.10%, holds over 5300 different bonds and offers a dividend yield of 1.6%.

 

Their performances have been very similar since 2008:

 

 

 

 

 

 

The holdings between the two funds are also very similar. Vanguard gets you a few percent more U.S. treasuries and international bonds while AGG gets you a few percent more mortgage bonds. The difference in holdings does not appear to drastically affect the funds returns, which have been very similar.

 

AGG holdings:

 

 

BND holdings:

 

Fixed income characteristics
Vanguard Total Bond Market ETF iShares Core Total U.S. Bond Market ETF
As-of date 10/31/2012 10/31/2012
Number of bonds 5391 1642
Average maturity 7.0 years
Average duration 5.0 years 4.4 years
Average coupon 3.80% 4.40%

 

The decision between AGG and BND will likely depend on your broker. AGG trades commission free with Fidelity and TD Ameritrade, while Vanguard funds are commission free for all Vanguard clients. Both AGG and BND have ample liquidity, low expense ratios and offer investors great diversification.

 

 

 

In Summary

 

 

Funds like those three above will be the fundamental building blocks for your portfolio for decades to come. A broad based stock fund, bond fund and international fund gives investors exposure to nearly all aspects of the world economy. Just those three funds offered by iShares gives investors access to over 4800 companies from around the world and over 1500 different bonds for expense ratios at or near industry lows.

 

iShares and Vanguard remain in a fight over industry dominance, which is great for individual investors, who have never had expense ratios this low.

 

 

** I currently own BND in my ROTH IRA.

 

 

I am also including some information on iShares other supplemental “core” funds. They advertise these funds below as being additions to a portfolio constructed using the funds listed above, giving investors exposure to smaller cap stocks, specific international markets or different duration bonds. We will go into greater detail on the funds below in a later post, for now just some quick facts.

IEFA – iShares Core MSCI EAFE ETF

Quick Facts:

 

–         Semi-annual dividend distributions

–         Tracks the MSCI EAFE Investable Market Index

–         0.14% Expense Ratio

 

Prospectus: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/is_p_iefa.pdf

 

 

IEMG – iShares Core MSCI Emerging Markets ETF

Quick Facts:

 

–         Semi-annual dividend distributions*

–         Tracks the MSCI Emerging Markets Investable Market Index

–         0.18% Expense Ratio

 

Fund launched on 10/18/12 and had yet to pay a dividend.

 

 

Prospectus: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/is_p_iemg.pdf

 

 

IJR – iShares Core S&P Small-Cap ETF

Quick Facts:

 

–         Quarterly dividend distributions

–         1.23% Dividend Yield

–         Tracks the S&P SmallCap 600 Index

–         0.16% Expense Ratio

–         Commission free for Fidelity and TD Ameritrade customers

 

Prospectus: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/is_p_ijr.pdf

 

 

IJH – iShares Core S&P Mid-Cap ETF

Quick Facts:

 

–         Quarterly dividend distributions

–         1.36% Dividend Yield

–         Tracks the S&P MidCap 400 Index

–         0.15% Expense Ratio

–         Commission free for Fidelity and TD Ameritrade customers

 

Prospectus: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/is_p_ijr.pdf

 

 

 

IVV – iShares Core S&P 500 ETF

Quick Facts:

 

–         Quarterly dividend distributions

–         2.03% Dividend Yield

–         Tracks the S&P 500 Index

–         0.07% Expense Ratio

–         Commission free for Fidelity and TD Ameritrade customers

 

Prospectus: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/is_p_ivv.pdf

 

 

 

ISTB – iShares Core Short Term U.S Bond ETF

Quick Facts:

 

–         Monthly dividend distributions*

–         Tracks the S&P Composite Barclays U.S. Government/Credit 1-5 Year Bond Index Index

–         0.12% Expense Ratio

 

*Fund launched 10/18/12 and has yet to pay any dividends.

 

Prospectus: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/is_p_istb.pdf

 

 

 

ILTB – iShares Core Long Term U.S. Bond

Quick Facts:

 

–         Monthly dividend distributions

–         3.41% Dividend yield

–         Tracks the Barclays U.S. Long Government/Credit Index

–         0.12% Expense Ratio

 

Prospectus: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/prospectus/is_p_iltb.pdf

 

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