iShares Core S&P Total U.S. Stock Market ETF: Buy It All, Limit Your Risk – iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA:ITOT)

Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception. – George Soros

The iShares Core S&P Total U.S. Stock Market ETF (ITOT) might be a mouthful, but it is a great way to get your broad U.S. stock exposure. It is well-diversified, with exposure to every sector as it is a holding with exposure to 90% of the total domestic stock market. This is something you can use at the core of your overall portfolio, as your beta play, and you can increase your alpha exposures outside of it. In terms of sectors, a chart breakdown is below.

One thing that is interesting about this ETF is its direct competition is likely any ETF that tracks the S&P 500 like the IVV. You would think that owning a total index versus an index of 500 stocks would cause significant underperformance over the long term in a bull market. But a look at the comparison total returns shows otherwise – in the last five years, ITOT has underperformed the IVV by less than 3% (2.92%). So, while you have more holdings inside of it, providing you more diversification, the returns are pretty similar. The outperformance of the IVV lately is likely due to the higher exposure to tech behemoths at the top of their holdings. For example, Microsoft (NASDAQ:MSFT) is only a 4.2% holding in the ITOT, whereas it is a 5.01% holding in the IVV. Frankly, trees do not grow to the sky, and eventually, the bottom will fall out of this tech run. I do not think that will happen for at least the next couple of years, which is why I am advocating a strong stock position in your portfolio. Still, less exposure to the big FAAMG stocks (Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Microsoft, Google (NASDAQ:GOOG)) is not a bad thing. I like the ITOT versus the IVV for that reason. And while we are nitpicking, the cost of ITOT is also cheaper at 0.03% MER versus 0.04% MER for the IVV.

Source: iShares

Another reason to own ITOT over IVV is the composition of the underlying P/E ratios and P/B ratios, as noted below. They are close, but if you told me you were investing in substantially the same holding for returns, but one had a higher price-to-earnings and price-to-book ratio and was more expensive, I think it would be a pretty easy decision for me to make. As mentioned in the Lead-Lag Report, given how far the markets have come, if there are no tax consequences for you to make this switch, I think you should strongly consider it.

Source: iShares

A look at some technical analysis of ITOT is also very comforting; it is just in a solid position here. The 50-day moving average and the 200-day moving average are showing some strong momentum after breaking out in October last year. The support levels are pretty clear after a sideways block from October 2018 to October 2019, which sets up excellent support around the $68-70 range. While it is slightly extended at this level, with the 50-day extended away from the 200-day, I wouldn’t go shorting it right now. I wouldn’t be surprised to see a short-term pullback, but if ITOT can hold the 50-day, a bounce-back would be likely.

A quick look at the fundamentals for the U.S. market also gives me more comfort in owning this position. Unemployment rates are at 50-year lows, and the consumer is very healthy – something that is good considering over 2/3 of GDP derives itself from the consumer. The Federal Reserve is intent on keeping interest rates low through 2020, so there is plenty of runway. While stocks are expensive, they are not outrageous and not close to their peaks in the last two decades. Of course, there are some significant risks out there.

The coronavirus outbreak is causing more trouble than initially thought, and there are concerns it turns into a global pandemic. Currently, it is mostly constrained to China, with many of the other cases contained in Asia. There is the risk of China and the U.S. having trouble getting their phase two trade deal together, although that concern might be pushed until after the U.S. election in November. The election, of course, is another issue that may cause some volatility. There are also rumors that the U.S. is trying to work a trade deal with India, but that it remains elusive.

The economic impact of Brexit is unknown. Japan just printed a -6% shrink in GDP in the fourth quarter of 2019 after a, frankly, misguided hike in consumption tax that likely wasn’t needed at the time. There are lots of things that can go wrong in the next year or two, but I think that the positives outweigh the negatives for the next year, and as long as the Fed stays put, the economic machine in the U.S. should continue for the foreseeable future.

Source: Bespoke Investment Group

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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