A one-stop holding for broadly diversified, low-cost exposure to the U.S. stock market.

fundcoverage@morningstar.comITOT
by Adam McCullough
3/13/2019
iShares Core S&P Total U.S. Stock Market

IShares Core S&P Total US Stock Market ETF is an attractive choice for diversified exposure to U.S. stocks of all sizes. It tracks a broadly diversified and representative benchmark at a low cost, which gives it a persistent edge over its category peers and supports a Morningstar Analyst Rating of Gold.

This fund tracks the S&P U.S. Total Market Index, a market-cap-weighted index that holds nearly every investable U.S. stock. Market-cap-weighting pulls the portfolio toward the largest U.S. stocks and accurately reflects the composition of the market. There are a few benefits of weighting by market capitalization. This approach incorporates the cumulative knowledge aggregated in stock prices to size its positions. It keeps costs low because it doesn’t require fundamental research analysts or skilled stock-pickers, who can be expensive to hire. While the market the market doesn’t always get things right, it has done a good job valuing stocks over the long haul.

Low turnover is another key advantage of the fund’s broad market-cap-weighted approach, as it mitigates transaction costs and the likelihood of taxable capital gains distributions. Compared with funds that track specific market size segments, this fund benefits more from weighting by market capitalization because it doesn’t have to sell or buy names as they cross arbitrary market-cap size segments. The fund’s average turnover over the past decade measured a small fraction of the average turnover of its category peers. Tax efficiency adds to the fund’s appeal. It has not distributed any capital gains since its inception in 2004.

The fund outpaced the large-blend category by 1.4 percentage points annually during the past 10 years through February 2019 with similar risk. Much of this outperformance can be attributed to the fund's cost advantage. Because this index fund is always fully invested, it suffered a larger drawdown than the category average during the financial crisis. But its smaller cash drag pays off during bull markets. The fund’s performance during the market recovery more than made up for its larger drawdown.



Portfolio Construction

This fund represents the entire investable U.S. equity market, effectively harnessing the market’s collective wisdom and diversifying risk. It earns a Positive Process Pillar score. The fund tracks the S&P U.S. Total Market Index, which holds nearly every investable U.S. stock. It switched from tracking the S&P 1500 Index to the S&P Total Stock Market Index in mid-December 2015. The S&P Total Market Index includes essentially all stocks traded on a major exchange that have readily available prices. In contrast, the S&P 1500 includes approximately 90% of the investable U.S. equity market. The primary difference between the two indexes is that the Total Stock Market Index includes micro-cap stocks and does not screen index additions for financial viability. Because both indexes weight constituents by market capitalization, their returns are highly correlated. While REITs are eligible for inclusion in the index, business-development companies, master limited partnerships, and over-the-counter bulletin-board issues are not eligible. The managers have historically used securities lending to generate additional income to offset the fund’s expenses and equity futures to invest excess cash.

Fees

BlackRock charges a low fee of 0.03% for this fund, which offers a sustainable advantage edge and supports its Positive Price Pillar rating. This is a fraction of the median category fee of 0.65%. During the trailing three years through February 2019, this fund outpaced its benchmark by two basis points annually. This implies the fund has been able to more than offset the performance drag created by its fee through a combination of savvy portfolio management techniques and securities lending.

S&P 500 index data: S&P 500 Copyright @ 2019

All data from Morningstar except U.S. intraday real-time exchange quotes, which are provided by BATS when available. End-of-day quotes for Nasdaq, NYSE, and Amex securities will appear 15 minutes after close. Graph times are Eastern Standard. @ Copyright 2019 Morningstar, Inc.