A Low-Cost Way to Complete a Large-Cap Portfolio
This fund is an inexpensive option for rounding out a U.S.-equity portfolio.
This fund is an inexpensive option for rounding out a U.S.-equity portfolio.
Vanguard Extended Market Index ETF (VXF) is an ideal supplement to a large-cap portfolio as it is designed to be paired with an S&P 500 Index fund. This fund tracks the S&P Completion Index, which holds virtually every liquid U.S. stock outside of those in the S&P 500 Index.
Filling the gaps in the S&P 500 means that the fund holds a handful of large-cap names that are not in the S&P 500, such as Facebook (FB) and Las Vegas Sands (LVS). These include companies that don't meet the S&P 500 Index's 50% public float requirement, companies that don't meet the index's domicile requirement, and recent initial public offerings that don't meet its six to 12 month seasoning requirement. The charts below graph the weightings of the largest 3,500 stocks in the S&P 500 and the S&P Completion Index ranked from largest to smallest. A few things stand out when looking at these charts. The first is the skew of the S&P 500 toward mega-cap stocks. The second is that the S&P Completion Index has most of its weight in the smaller stocks toward the right-hand side of the chart. It is also apparent that the S&P Completion Index includes a smattering of larger names that are absent from the S&P 500 for the reasons outlined above. That said, the majority of the Completion Index consists of mid- and small-cap names and is rounded out with a decent chunk of micro-cap stocks.
The result is that the Completion Index's portfolio behaves very similarly to a mid-cap index fund. In fact, since the Completion Index's inception nine years ago, it's had a 99% correlation to the Morningstar Mid Cap Index. Investors who pair this fund with an S&P 500 Index fund or ETF such as Vanguard S&P 500 ETF (VOO) effectively gain exposure to the total U.S. stock universe. A passive allocation to U.S. equities would hold a 78% position in an S&P 500 Index fund and 22% in this fund.
The S&P 500 Index and the S&P Completion Index have had a 95% correlation since the Completion Index's inception, so the diversification benefits are minimal. That said, mid-and small-cap stocks tend to be riskier as they exhibit greater sensitivity to macroeconomic risks and they typically lack economic moats, or sustainable competitive advantages. The greater risk in smaller stocks is evident in their volatility. Since inception, the standard deviation of monthly returns of the index that this fund follows was 19.4%, compared with 15.4% for the S&P 500 Index. With this greater volatility comes a higher beta and the expectation for higher returns to compensate for heightened risk. Over that same time period, the Completion Index returned 8.94% on an annualized basis compared with 6.66% annualized for the S&P 500.
For investors looking for an all-encompassing passive allocation to U.S. stocks, we recommend a single fund such as Vanguard Total Stock Market ETF (VTI) or iShares Core S&P Total US Stock Market ETF (ITOT). Those already holding an S&P 500 fund looking to round out their portfolio with mid- and small-cap stocks are faced with a choice: either add a fund tracking a completion index such as this, resulting in two positions, or sell the S&P 500 fund and allocate the proceeds to a total market fund, resulting in just one holding. Holding the entire stock market in just one fund eliminates the need to rebalance as stocks migrate from one market-cap size segment index to another, and in the case where mid-caps outperform large caps. However, if selling the S&P 500 fund would result in capital gains taxes, investors are likely better off with the two-fund approach.
Portfolio Construction
This fund tracks the S&P Completion Index, which contains all of the liquid securities on the NYSE and Nasdaq that are not components of the S&P 500 Index. While the index holds about 3,260 securities, the fund holds about 3,060. With that level of replication, tracking error has been minuscule. The fund delves deeper into micro-cap territory than the S&P 1500 Index. The average mid-blend fund has an average market cap of $7.0 billion and virtually no micro-cap exposure, whereas this fund has an average market cap of $3.0 billion and a nearly 14% stake in micro-cap stocks. To the extent that the S&P 500 Index has a slight quality tilt, this portfolio would have the opposite tilt since it is the complement of that index. Any stock being added to the S&P 500 will be removed from this index, and vice versa.
Alternatives
This ETF charges 0.10%. That beats the 1.18% fee levied by the average mid-blend fund as well as the 0.40% average fee charged by the average mid-blend ETF. Although there are no perfect ETF alternatives to this fund, there are a couple of index mutual funds that track completion indexes. Fidelity Spartan Extended Market Index Investor shares carry a 0.10% expense ratio and require a $2,500 investment. Vanguard Extended Market Index Admiral (VEXAX) is the mutual fund share class of VXF, but it requires a $10,000 minimum investment.
Those looking for more-focused mid-cap exposure might consider iShares Core S&P Mid-Cap (IJH) at 0.15%, which tracks the next 400 largest stocks after the S&P 500. Those looking for a total market fund might consider Vanguard Total Stock Market ETF (VTI), which charges an annual fee of just 0.05%.
Register for Our Free Webinar
Understanding Factor Investing
Join Sam Lee, ETF strategist and editor of Morningstar ETFInvestor, for a lesson on factors and how to put them to work in your portfolio.
December 10 | 4:15 p.m. ET
Register for Free >>
| ETFInvestor Newsletter | |
Want to hear more from our ETF strategists? Subscribe to Morningstar ETFInvestor to find out what they're buying—and selling—in their portfolios. | One-Year Digital Subscription 12 Issues | $189 Premium Members: $179 Easy Checkout |
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.