Exchange-traded funds (ETFs) have experienced one of the largest stock market investment surges in recent history. Aside from democratizing access to numerous asset classes and investment strategies, these low-cost, flexible, liquid securities have come to offer investors enticing exposure across sectors and industries without requiring extensive research into specific companies, leading many to regard them as an easy way to track markets.
One type of ETF which has recently proven particularly appealing to investors is the ‘total market’ ETF, which allows solo investors to track an entire equity index with a single ETF share purchase. Understanding why these securities are worthy of investment is both useful and increasingly important in formulating a sound long-term asset management strategy. Here you’ll find three key reasons to buy in.
Big tech companies like Apple and Microsoft are always a good investment, but the price of even one stock can often be steep. Spreading investment across multiple industries rather than concentrating it into a single tech company often wins the bet – a hedging strategy that most solo investors employ. But with total market ETFs, there's no need to heft a large bill while gaining exposure to the big firms. Some high-profile total market ETFs are managed with over 20% exposure to tech stocks, and one share in such a fund can afford profitable exposure to firms including the ‘big five’ – Microsoft, Apple, Amazon, Alphabet (Google) and Facebook – while avoiding higher-risk concentrated investment.
High Trading Volumes
The precise-exposure appeal of industry-specific ETFs can be seen as broadly qualified by the fact that most experience days of low trading volume. This can lead to significant delays when one wants to buy or sell shares, and can affect prices quite dramatically when a trade is actually completed. This is generally not the case with total market ETFs, however. Since more people want to invest across the whole stock market, total market ETFs usually exceed expectations in trading volume, indicating that, when one wants to purchase shares, this will likely be possible at the exact price one wants.
Reduced Research Requirements
Most worthy investments need extensive due diligence before purchase. To know a company requires understanding of its business structure, its current ownership, its plans, and its current value. But with total market ETFs, fund allocation managers have already done most of the work for the investor - in fact, the only research required is to study an ETF's asset distribution. Different ETFs may mirror the same market but may distribute assets differently within that market. The VTI, for example, distributes about 20% of its total fund value to the tech ‘big five’; another similar fund only invests about 18% of its funds in those companies and instead focuses more of its funds on pharmaceutical firms. The different allocation strategies used create diversity in the market and allow selection of the total market ETF that distributes more assets to industries the investor knows best.
Choosing stocks to invest in is no easy task. From small companies to emerging markets, there are almost too many choices. Total market ETFs can simplify decision making, enabling whole-market exposure through a single transaction. Naturally, the sub-class poses risks, particularly for those inexperienced with such types of securities, and the financial services and asset-management ecosystem has begun to respond in order to facilitate investors’ exploitation of its opportunities. As well as some larger banks and management firms, boutiques such as London-based Brazos Wealth have been developing deeper familiarity with this sub-class and have begun to offer clients advisory and facilitation packages adapted to its dynamics and current management strategies.
As the popularity of these securities grows, the relevance of finding total market ETFs to suit investors’ sector and industry preferences will increase for the formulation of investment strategies. Those making inroads into this sub-class may well find their performance significantly boosted, and increasing structure in investment approaches, both among firms and individuals, reflects upward trends in interest and optimism which will likely persist for the foreseeable future.