When it comes to equity-based exchange traded funds, advisors and investors have widely embraced diversified, broad market funds. The thing is when it comes to diversification, most of those funds tilt toward large-cap stocks.
That can situation can leave investors scrambling to find appropriate mid- and small-cap access, which can often result in the purchase of multiple ETFs. Of course that is an easy to solve the all-cap conundrum, but investors can simplify things even further with an ETF that blends micro-, mid- and small-cap stocks under one roof.
Enter the Vanguard Extended Market ETF (NYSE:VXF). The $3.9 billion Vanguard Extended Market ETF tracks the Standard & Poors Completion Index, a benchmark that covers the universe of Nasdaq, New York Stock Exchange and over-the-counter stocks not found in the S&P 500.
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VXF invests all, or substantially all, of its assets in stocks of its target index, with nearly 80% of its assets invested in the 1,200 largest stocks in its target index (covering nearly 80% of the indexs total market capitalization), and the rest of its assets in a representative sample of the remaining stocks. The fund holds a broadly diversified collection of securities that, in the aggregate, approximates the full index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield, according to Vanguard.
Due to larger-than-average exposure to micro-cap stocks as well as some exposure to volatile large-caps, volatility is not absent from VXF.
Both of these factors drive volatility higher than the typical mid-blend fund. The volatility of return on the S&P Completion Index as measured by standard deviation was nearly 4 percentage points higher than that of the S&P 500 during the past decade, and the fund dropped 57.9% in the bear market from October 2007 to March 2009. That is a steeper decline than both the S&P 500 and the mid-blend Morningstar Category, said Morningstar in a recent note.
Financial services are by far the largest sector weight in VXF at 25.7 percent as of the end of the third quarter. However, consumer discretionary, healthcare and technology stocks, all sectors that can be somewhat volatile in smaller cap spectrums, combine for over 45 percent of the ETF's weight.
Bull Run Ending Soon?
Since the start of the current bull market on March 10, 2009, VXF has gained 282.5 percent compared to 234.4 for the S&P 500, but that lengthy run of outperformance may not mean more of the same is coming.
VXF has beaten the S&P 500 by nearly 1.9 percentage points annualized during the past 15 years. That streak of outperformance has caused the portfolio's smaller stocks to appreciate to levels that look expensive relative to large caps. As of September 2015, the stocks in this fund that our analysts cover trade at a price/fair value of 0.97, while the less-volatile large caps in the S&P 500 trade at a more attractive price/fair value of 0.94, according to Morningstar.
VXF charges just 0.1 percent per year, or $10 for every $10,000 invested. That is less expensive than 91 percent of rival funds, according to issuer data.
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