After six years of a relentless climb, the stock market appears to be exhausted with a less positive outlook in 2016. However, long-term investors still need to have equity exposure, and total stock market funds may be the soundest option. Total stock market funds own the entire universe of investable U.S. stocks, which eliminates the decision of how to allocate your investments among large-, mid- and small-cap stocks. They can be far more efficient than trying to piece together three funds covering the different market capitalizations, unless you have a different idea of how they should be weighted. Because most of the larger total stock market funds track similar indexes, there is little to differentiate between them in terms of composition of their portfolios. However, there are enough differences to separate them for comparison purposes. The exchange-traded funds (ETFs) compared below are considered two of the best and largest total stock market funds.

Vanguard Total Stock Market ETF

Launched in May 2001, the Vanguard Total Stock Market ETF (NYSEARCA: VTI) has been called the quintessential core stock holding. At $57.82 billion in assets under management (AUM) as of March 2016, it was the fourth-largest stock ETF. The fund was highly liquid, with an average daily trading volume (ADTV) of 3.3 million shares. It utilizes a sampling methodology to track the performance of the CRSP US Total Market Index.

iShares Russell 3000

The iShares Russell 3000 ETF (NYSEARCA: IWV) was launched one year earlier than VTI but has far fewer assets at $5.94 billion as of March 2016. The fund was also less liquid, with an ADTV of 299.43. It is designed to track the performance of the Russell 3000 Index, which is comprised of the largest 3,000 U.S.-traded stocks.

Comparing the Two ETFs: Portfolio Composition

Because they invest in similar market indexes, the two funds have very similar portfolio compositions. VTI holds more stocks because it tracks a broader index. This allows it to pull in some more small- and micro-cap stocks, which can give it some more upside potential, but it can also introduce more volatility. Both ETFs follow a market capitalization sampling approach, which means the holdings at the top of the portfolio are always going to be very similar. The top five holdings for both portfolios are Apple, Inc. (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), Exxon Mobil Corporation (NYSE: XOM), Johnson & Johnson (NYSE: JNJ) and General Electric Company (NYSE: GE), with nearly identical weightings.

Comparing the Two ETFs: Investment Performance

The two funds have very similar investment returns. As of March 2016, VTI edged out the IWV by 0.10 to 0.025 basis points in the 10-, five- and three-year time frames with returns of 6.87, 11.02 and 10.88%, respectively. In the same time frames, IWV had returned 6.58, 10.85 and 10.72%, respectively.

Comparing the Two ETFs: Investment Costs

The only discernible difference between the two funds was in their investment costs, which can account for the slight difference in investment returns. At 0.05%, VTI had one of the lowest expense ratios of any ETF, while IWV’s expense ratio, although lower than the average in its category, was 0.20%. Even though the difference seems small, when compounded over the years, it can have a larger impact on long-term investment performance. As evidence of that impact, the annualized return of VTI since inception was 5.41% compared to 4.72% for IWV.

The Bottom Line

For long-term investors, if everything else is equal, fees do matter. Investors with a long-term horizon of 10 years or more should always consider fees when choosing among similar funds. In that regard, VTI is a better investment option. For short-term traders, VTI is a better choice because of higher trading volume, which reduces the bid/ask spread and makes it far easier to trade in and out of the shares.

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