iShares shook up the ETF marketplace last March when it launched its Core family of low-cost ETFs in the major asset classes. This week iShares announced some new additions to its Core lineup, including two broad-market funds that go head-to-head with recently launched ETFs from Vanguard. Let’s take a peek at these compelling new offerings.
Blanket coverage of the US
First up is the iShares Core S&P U.S. Total Market (XUU), which provides exposure to the broad US stock market, including large, mid and small cap stocks.
This is iShares’ answer to the Vanguard U.S. Total Market (VUN), and it comes in five basis points cheaper, with a management fee of just 0.10%. However, the coverage is not quite as complete: VUN holds more than 3,800 stocks, compared with 1,500 for XUU. Although XUU’s benchmark is the S&P Total Market Index (which includes almost 3,900 companies) the fund actually holds three US-listed ETFs that make up the S&P Composite 1500 Index. But we should keep this in perspective: the other 2,300 companies are so small that they collectively make up just 10% of the US market, so one should expect VUN and XUU to perform similarly.
One-stop global diversification
The iShares Core MSCI All Country World ex Canada (XAW) is a one-fund solution for adding global diversification to an equity portfolio, with broad coverage of the US, developed and emerging markets.
The counterpart here is the Vanguard FTSE All-World ex Canada (VXC), launched last June and recently added to my model ETF portfolios. In this case, the new iShares ETF actually offers broader coverage: it holds about 5,000 stocks, compared with just over 3,000 for VXC. Again, the management fee is five basis points lower at just 0.20%.
XAW holds five underlying funds: it gets US exposure through the three ETFs that make up the S&P Composite 1500; it gets European and Asian developed markets through the iShares Core MSCI EAFE IMI (XEF); and it covers emerging markets through the iShares Core MSCI Emerging Markets (IEMG).
This ETF does not use currency hedging, so Canadian investors will be exposed to a basket of foreign currencies: primarily the US dollar (just over half of the fund), the British pound, the yen and the euro.
Should I switch?
I’ll try (probably unsuccessfully) to head off the questions I always get whenever new ETFs are launched with lower fees: “Are you going to update your model portfolios with these new funds?” and “If I already own VUN or VXC, should I sell them and buy these new ones?”
The answer to both questions is no, at least for now. These new iShares offerings look like excellent products, and if you’re building a portfolio from scratch I would have no hesitation recommending them as alternatives to the Vanguard ETFs in my model portfolios. (The same is true of the iShares and BMO Canadian equity ETFs, which are perfectly good alternatives to VCN.) The difference it will make to your long-term performance is likely to be trivial. And it makes no sense to incur trading commissions and bid-ask spreads to save 0.05% a year in management fees. Remember, that’s $5 on a $10,000 investment.
However, if you already hold one of the Vanguard ETFs, these new funds may be useful for tax-loss selling. This strategy works best when you can find two ETFs that get very similar market exposure while tracking different indexes. There really were no ETFs that made good substitutes for VUN and VXC until now. One of these days, when we actually see significant losses in US or international equities—that hasn’t happened since 2011, not that we’re complaining—one could harvest a loss in VUN and purchase XUU in its place, or sell VXC and replace it with XAW.