Our favourite ETFs for exposure to the US share market
These are the top picks from our analysts for ETFs that provide access to the US share market.
Investors are increasingly turning to ETFs to get exposure to global markets. Our analysts have recently given their highest rating to two ETFs that provide exposure to US equity markets.
The first ETF to receive a Morningstar Gold Analyst Rating is the Vanguard US Total Market Shares ETF (ASX: VTS). The ETF holds 3,743 shares which represent the entire investable universe in the US spanning the largest to smallest publicly traded companies.
The second ETF to receive a Morningstar Gold Analyst Rating is the iShares S&P 500 ETF (ASX: IVV) which tracks the S&P 500 index which makes up the 500 largest publicly traded companies listed in the US.
Below is a summary of the views of our analysts. For more information on how to choose an ETF please see our article on a step by step process.
Vanguard US Total Market Shares ETF
Vanguard Total Stock Market funds offer highly-efficient, well-diversified and accurate exposure to the entire U.S. stock market, while charging rock-bottom fees—a recipe for success over the long run.
The funds track the CRSP US Total Market Index, which represents approximately 100% of the investable U.S. opportunity set. The index weights constituents by market cap after applying liquidity and investability screens to ensure the index is easier to track.
Market-cap weighting forms the bedrock of this strategy, which harnesses the market’s collective wisdom of each holding’s relative value with the added benefit of low turnover and trading costs. It’s a sensible approach because the market tends to do a good job pricing the large-cap stocks that make up the bulk of this portfolio. Large-cap stocks attract liquidity and widespread investor attention such that prices quickly reflect new information.
Total-market funds mitigate transaction costs because they don’t target specific segments of the market and aren’t prone to forced buying or selling when stocks enter or exit a market segment. Still, a small amount of turnover can occur at the lower rungs of the portfolio.
The index implements buffer rules around its lower market-cap bound to limit unnecessary turnover since dealing in thinly traded small and micro-caps can increase transaction costs. The index further reduces trading costs by spreading rebalancing trades over several days to limit market impact costs.
The index includes small- and micro-cap stocks, which improve the end portfolio’s diversification and can provide a performance edge when small caps rally, as they did in the fourth quarter of 2020. They tend to be more volatile than large-cap stocks but have minimal impact given that they make up less than 10% of the portfolio.
Market-cap weighting may expose the strategy to stock- or sector-level concentration risk when a few richly valued companies or sectors power most of the market gains, such as year-end 2023. As of November 2023, the top 10 holdings made up the largest portion of the index (27%) since its 2011 inception. Likewise, the 28% allocation to tech stocks was the highest over the same period. But this is not a fault in design: The CRSP US Total Market Index simply reflects the market’s composition. In the long run, its broad diversification, low turnover, and low fee outweigh these risks.
iShares S&P 500 ETF
iShares Core S&P 500 funds offer well-diversified, market-cap-weighted portfolios of 500 of the largest U.S. stocks. The funds accurately represent the large-cap opportunity set while charging rock-bottom fees, a recipe for success over the long run.
The funds track the flagship S&P 500, which selects 500 of the largest U.S. stocks—roughly 80% of the U.S. equity market—and weights them by market cap. An index committee has discretion over selecting companies that meet certain liquidity and profitability standards. While a committee-based approach may lack clarity, it adds flexibility to reduce unnecessary changes during reconstitution, taming transaction costs compared with more-rigid rules-based indexes.
The end portfolio is well-diversified and accurately resembles the U.S. large-cap opportunity set. This allows the strategy to capitalize on its low fee, ultimately delivering sound long-term performance on both an absolute and risk-adjusted basis.
The bedrock of this strategy is market-cap weighting, which harnesses the market’s collective wisdom of the relative value of each holding with the added benefit of low turnover and associated trading costs. It’s a sensible approach because the market tends to do a good job pricing large-cap stocks. The companies in this portfolio attract liquidity and widespread investor attention, such that prices reflect new information quickly.
However, when few richly valued companies or sectors power most of the market gains, market-cap weighting may expose the strategy to stock- or sector-level concentration risk, as is the case at year-end 2023. As of December 2023, the top 10 holdings made up the largest portion of the index (30%) in several decades, and the 30% allocation to technology stocks was the highest since the dot-com bubble. But this is not a fault in design, the S&P 500 simply reflects the market composition. In the long run, its broad diversification, low turnover, and low fee outweigh these risks.
