A basic investment strategy is to put together an asset allocation plan -- dividing your investment money between different types of investment such as stocks, bonds, real estate and precious metals. A total stock market exchange traded fund allows you to cover one asset class -- stocks -- with a single investment choice.
A total stock market ETF is designed to own stocks of all of the U.S. companies with shares trading on the stock exchanges. The largest total market ETFs are sponsored by Vanguard, Charles Schwab, iShares and SPDRs. All total market funds own stocks based on each company's size or market capitalization. This means that the largest companies have bigger representation in the fund values than do smaller ones.
Total stock market ETFs give investment exposure to small- and mid-cap stocks, which are not included in the major stock market indexes or related ETFs that track the S&P 500 index. The typical total stock market index ETF owns shares of about 3,000 stocks, compared with the 500 owned by an S&P 500-tracking ETF. Those 2,500 additional companies are the small and midsize companies trading on the stock exchanges. The small- and mid-cap sectors of the market can produce different return results from the widely followed large companies. The large-cap companies of the future will come out of these thousands of smaller firms.
Because the total stock market ETFs own basically all of the stocks on the U.S. markets, the funds do not buy and sell shares frequently, which helps keep expenses low. The four large total stock market ETFs have annual expense ratios of 0.20 percent or less, and the expenses on the Vanguard and Schwab funds are well below 0.10 percent.
Owning a single investment to cover one investment asset class -- in this case stocks -- makes it easier to rebalance an investment portfolio to maintain your selected asset allocation. When it is time to rebalance your portfolio assets -- possibly quarterly or annually -- you can calculate the value of your total stock market ETF in relation to the desired stock allocation percentage. You then can rebalance your stock allocation with a single trade to buy or sell shares of the ETF.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.