The Best ETFs For Investing in the U.S. Stock Market

It's probably a wise move to allocate a substantial portion of your equity investments in U.S. stocks. Why? Simply put, by market cap weight, U.S. equities comprise about 70% of the MSCI World Index and 62% of the FTSE Global All Cap Index. The sheer scale and global dominance of the U.S. market make it a pivotal component of any diversified portfolio.

Given the popularity of U.S. equities, the broad market index segment of the ETF industry here is fiercely competitive, especially in terms of expense ratios. Savvy investors know that shopping around can really save a few bucks, which can significantly impact returns over time.

Today, I’m focusing solely on low-cost passive index ETFs. We’re steering clear of factor-based, dividend-focused, or actively managed options. The reason is straightforward: according to SPIVA, most funds fail to beat their benchmark indices over long periods.

By choosing passive index ETFs, I’m putting the odds in my favor. With that out of the way, let's take a look at your available options.

Large-cap U.S. exposure

If your investment focus is on the blue chips, the most cost-effective way to gain exposure is through an S&P 500 index ETF.

This index is not just a straightforward listing of the 500 largest U.S. stocks by market cap; it's a bit more selective than that. It's a free float market cap weighted index, where the stocks are chosen by a committee based on additional criteria like trading volume and positive earnings, introducing a subtle active component to its composition.

The S&P 500 is known for being a low-turnover index, with an annual turnover rate of about 2.2% as of 2024. This means that the index does not frequently change its components, making it a stable and predictable gauge of the large-cap U.S. market.

This segment of the ETF market is incredibly popular, with the SPDR S&P 500 ETF Trust (SPY) leading the pack. Launched in January 1993, SPY is the oldest and one of the largest such ETFs, boasting about $551 billion in assets under management.

It features a very narrow 30-day median bid-ask spread of just 0.01% and supports the most active and well-developed options chain in the market. If you're looking to actively trade the S&P 500, SPY is tailor-made for that, albeit at a higher expense ratio of 0.0945%.

For a more cost-effective holding, consider the duo from BlackRock and Vanguard: the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO), both charging a mere 0.03% in expenses. These ETFs are also highly liquid and offer options trading, though not as extensive as SPY, making them ideal for a buy-and-hold strategy.

For an even more economical choice, the SPDR® Portfolio S&P 500® ETF (SPLG) stands out. Think of it as the little brother to SPY—it offers much lower share prices and an expense ratio of just 0.02%. If you're not involved in options trading, SPLG offers an advantage over SPY in terms of cost.

Venturing off the beaten path from the branded S&P 500 indices, consider the BNY Mellon US Large Cap Core Equity ETF (BKLC). It boasts a true 0% expense ratio, meaning it's free to hold, excluding brokerage commissions and bid-ask spread costs.

BKLC doesn't track a brand-name index but uses the Solactive GBS United States 500 Index, which tracks the largest 500 U.S. equities by float-adjusted market cap, offering a straightforward and very cost-effective approach to investing in large U.S. companies.

Total U.S. Stock Market Exposure

If you're looking to "buy the haystack" as Jack Bogle famously recommended, the S&P 500 might not fully meet your needs.

Instead, to capture the broader U.S. equity market, including mid-caps and small-caps in market cap-weighted allocations, you'll want a total market approach. Fortunately, index ETFs in this niche are as economically priced as their S&P 500 counterparts.

From my perspective, there are four main choices in this arena, all offered by reputable fund managers with similar expense ratios and underlying sector exposure and top holdings.

Although the indexes they track differ, all of these options will still lean towards large-caps due to their market cap weighting and will represent a blend of growth and value styles:

1. Vanguard Total Stock Market ETF (VTI): With an expense ratio of 0.03%, this ETF tracks the CRSP US Total Market Index. It's a comprehensive option that aims to reflect the entire U.S. equity market, including over 3,500 stocks.
2. iShares Core S&P Total U.S. Stock Market ETF: Also charging a 0.03% expense ratio, this ETF follows the S&P Total Market Index. It provides exposure to virtually every publicly traded U.S. equity, from the largest giants to some micro-caps.
3. SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM): This ETF has an expense ratio of 0.03% and tracks the S&P Composite 1500 Index, which includes the S&P 500, S&P MidCap 400, and the S&P SmallCap 600.
4. Schwab U.S. Broad Market ETF (SCHB): With an expense ratio of 0.03%, SCHB tracks the older Dow Jones U.S. Broad Stock Market Index. It includes the top 2,500 largest U.S. stocks.

What's the difference among these options? According to the overlap analysis below, the variations are minimal and inconsequential.

The crucial takeaway here is that because all the indexes are different but the top holdings, sector exposure, and performance are similar, you can use all four interchangeably as tax-loss harvesting partners, given that they are not "substantially identical." This flexibility is invaluable for managing your portfolio efficiently while adhering to IRS guidelines on wash sales.