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Investing theory holds that exposure to the full extent of the stock market beats a focus on big companies alone over the long term.

I don’t get it. In periodically comparing total stock market ETFs with competitors focusing on a tighter portfolio of big blue chips, I have yet to see the total market approach pull away.

Total market ETFs bundle small- and medium-size stocks along with the big companies that most of the widely followed indexes emphasize. You inject more risk into a portfolio by adding smaller stocks, but the reward should be better long-term results. Lower lows for higher highs, in other words.

The stock market volatility of 2020 seems an interesting time to road test total market ETFs again. We saw a variety of market conditions during this period – a sudden crash, and a fast rebound most of the way back. Did the total market approach shine at any juncture?

Not so much, if you use a pair of Vanguard ETFs as a gauge. The $641-million Vanguard FTSE Canada Index ETF (VCE-T), with a portfolio of 57 big blue chips, was up 2.9 per cent in May, down 9.2 per cent for the first five months of 2020 and up an annualized 3.6 per cent over the five years to May 31. These are all total returns, with dividends added to changes in share price.

The $2.3-billion Vanguard FTSE Canada All Cap Index ETF (VCN-T) made 2.8 per cent in May, lost 10.1 per cent for the year to May 31, and made an average annual 2.9 per cent for the past five years. VCN holds 195 stocks, roughly one quarter of them running from medium to small in terms of market capitalization (shares outstanding times market price).

This year’s been an eventful one for stock markets, so you might have forgotten that we had two dramatic years in 2018 (double-digit losses) and 2019 (double-digit gains). In neither market did VCN outshine its sibling ETF. VCE lost 10.5 per cent in 2018 and surged a tick less than 19 per cent in 2019, while VCN fell 11.4 per cent in 2018 and jumped 18.5 per cent in 2019.

There’s no fee difference between VCE and VCN – both have a satisfyingly low management expense ratio of 0.06 per cent. Picking between their blue chip and broad market mandates is a matter of your faith in the hard-to-spot benefits of greater diversification.

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