Many investors see ‘broad market’ ETFs as a great way to gain low cost exposure to the US stock market. And they are correct, I also think a low fee broad market ETF is a great foundation for most portfolios.

But which ETF is the best of the bunch in this area? And do all these ‘broad market’ ETFs invest in the same way in the same companies?

Here is a closer look at 3 of the most popular ETFs in this space:

Ishares Dow Jones US Index Fund (NYSE: IYY )- This fund’s focus is indeed on the entirety of the US stock market. It does not focus on the S&P 500, Dow Jones, or NASDAQ specifically, but invests in companies within all these indexes and across all sectors. It is a capitalization weighted ETF with close to 1400 holdings.

Over the past 2 years the ETF returned -26.6% (excluding dividends) while the S&P 500 returned -28.2% (excluding dividends). This difference is mainly due to the fact IYY holds non S&P 500 holdings.

The total expense fee is 0.2% per year.

SPDR S&P 500 ETF (NYSE: SPY )- This funds’ focus is solely to emulate the S&P 500, so it has a slightly more narrow focus than IYY or VTI. Still it invests in companies within all sectors and industries and it is still considered broad market. It has 500 holdings (corresponding with the S&P 500) as it mirrors the weightings of holdings in the index itself.

Over the past 2 years the ETF returned -28.1% (excluding dividends) while the S&P 500 returned -28.2% (excluding dividends). This represents a miniscule tracking error (in the investors favor), as even with the expense fee the ETF outperformed the index.

The total expense fee is 0.1% per year.

Vanguard Total Stock Market ETF (NYSE: VTI )- This fund, like IYY, attempts to emulate the performance of the entire US stock market. The fund owns about 2X as many equities as IYY at 3,385, but the top 10 holdings represent 16% of the total portfolio.

Over the past 2 years the ETF returned -26.8%, compared with -26.6% from IYY, and -28.2% from the S&P 500 (all excluding dividends).

The total expense fee is 0.09% per year.

In summary any of these funds are good investments to hold as a low cost proxy for the broad US market. When all else is nearly equal cost is a good tiebreaker, which would point to the Vanguard fund (VTI ) if you want the broadest exposure at the lowest price.

However one important point is that all 3 are poor choices to capture any of the movement with mid and especially small cap equities. If an investor does want mid or small cap exposure you would need to purchase another market cap specific ETF, as the above 3 are heavily weighted to large and mega cap.

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