Making Salsa With ETFs

Making Salsa With ETFs

The ETF universe offers the core ingredients for a solid portfolio recipe.

Reviewed by: Craig Israelsen
Edited by: Craig Israelsen

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Craig Israelsen, Ph.D., creator of the 7Twelve portfolio, consultant to 7Twelve Advisors, LLC and executive-in-residence in the Financial Planning Program at Utah Valley University.

As of Sept. 30, 2020, there were a total of 2,409 U.S.-listed ETFs holding a total of $4.74 trillion in net assets. Those 2,409 ETFs were sorted into 96 different categories by Morningstar. The largest 10 categories (by assets) are shown below in Figure 1.

Breaking Down The Universe
The category with the largest amount of assets is, not surprisingly, large cap U.S. blend. This is the category the S&P 500 Index fits into. There are 202 ETFs in the large blend category, and as a group, they hold $1.17 trillion in assets.

Amazingly, just four S&P 500 ETFs (the SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), Vanguard S&P 500 ETF (VOO) and SPDR Portfolio S&P 500 ETF (SPLG)) collectively hold $678 billion—or nearly 58% of all the assets in the entire “large blend” ETF category (which includes a wide array of ETFs that do not attempt to explicitly track the cap-weighted S&P 500 Index). The largest ETF in the U.S. large cap blend category is SPY, with $295 billion, which equals 25.04% of all the large blend assets.

The next largest ETF category (by assets) is large cap growth, with 60 ETFs holding a collective total of $366 billion. The largest ETF in that group (the Invesco QQQ Trust (QQQ)) holds $135 billion, or nearly 37% of all large growth assets.


Figure 1: ETF Universe Assets By Category
2,409 ETFs with $4.74 Trillion in Assets as of 9/30/2020
(10 categories with largest asset base shown in table)

10 Largest ETF Categories by Net Assets
(96 Total Categories)

Number of ETFs in Category

% of Total ETFs in Each CategoryCategory Total Assets
($ billion)
% of Total ETF AssetsAssets in the Largest ETF in Each Category
($ billion)
% of Category Assets in Largest ETFExpense Ratio of Largest ETF in CategoryAverage Expense Ratio of Entire Category
Large Blend2028.39%1,17924.85%295.325.00%0.10.44
Large Growth602.49%3667.71%134.636.70%0.20.43
Foreign Large Blend753.11%3367.09%74.622.20%0.050.36
Large Value1044.32%2856.01%51.117.90%0.040.37
Intermediate Core Bond220.91%1803.79%80.845.00%0.040.18
Diversified Emerging Mkts753.11%1763.71%60.334.20%0.10.49
Commodities (Focused)863.57%1412.96%76.954.70%0.40.63
Midcap Blend471.95%1402.95%43.531.00%0.050.33
Small Blend532.20%1372.89%41.330.20%0.060.36


The third largest category is non-U.S. large blend ETFs, with $336 billion, of which nearly $75 billion is in the Vanguard FTSE Developed Markets ETF (VEA) (or just over 22% of the total assets in the category). Large cap U.S. value is the fourth largest category, holding $285 billion in assets. Its largest ETF is the Vanguard Value ETF (VTV), with $51 billion, or nearly 18% of the total category assets.

When combining the net assets of all the large-cap U.S blend, large-cap U.S. growth and large-cap U.S. value ETFs, we arrive at $1.83 trillion, or 38.6% of all U.S.-listed ETF assets across all 96 categories.

Perhaps more revealing is that those largest 10 categories shown in the table represent a total of 797 ETFs, or 33.1% of all 2,409 ETFs. However, those 797 ETFs hold $3.08 trillion, which equals 64.9% of all U.S.-listed ETF assets.

Finally, if we forget the categories and simply rank the 2,409 ETFs by net assets, we find that the largest 50 ETFs (the top 2% of ETFs by size) hold a staggering $2.69 trillion—or 56.8% of all the assets.

It is encouraging to note that the average expense ratio for those 50 mega ETFs is 13 bps. Even better, the asset-weighted expense ratio of the 50 largest ETFs is 10.9 bps. The ETF world is getting cheaper—and that’s a good thing.

Of the 2,409 ETFs, there are roughly 350 that have a 50% or higher exposure to U.S. fixed income, representing an asset base of approximately $865 billion. Add in 46 ETFs that focus on non-U.S. bonds (i.e., have more than 50% of their portfolio in non-U.S. bonds) and hold a total of $69 billion in assets, and we have just under 400 fixed income ETFs with a total of about $934 billion in assets. Bond ETFs (with an allocation of 50% or more to bonds) represent 16.5% of all ETFs, with roughly 19.7% of all ETF assets.

ETFs As Portfolio Building Blocks
ETFs are analogous to salsa ingredients. Only by adding diverse ingredients together can we achieve the desired outcome. However, there are some ingredients in salsa that most of us would never want to eat individually, like hot peppers or Tabasco sauce. But without the “hot” ingredients, the salsa would be flat.

Similarly, investment portfolios should include a wide variety of diverse ingredients, or “assets.”  An ETF that invests in U.S. stocks is clearly an appropriate core ingredient in most portfolios, analogous to tomatoes in salsa. But U.S. stocks are only one asset class. More asset classes are needed.  We need non-U.S. stocks.

But, even after adding non-U.S. stock, our portfolio still only has “stock” ingredients. Additional asset classes need to be added, such as real estate, natural resources, commodities, U.S. and non-U.S. bonds, inflation-protected bonds, and finally, cash for liquidity.

Each different ETF adds an important dimension to the diversified portfolio because each one, ideally, has the potential to behave differently than the other ETFs from year to year. This diversity is vitally important in salsa … and in portfolios.

Here is something to consider: The salsa recipe is more important than where we purchase the salsa ingredients. Likewise, where we purchase the ETFs (Vanguard, Schwab, etc.) is less important than the structure of the asset allocation model (i.e., portfolio recipe).

Shown below is the 20-year performance of the 7Twelve model built using ETFs from Vanguard, Schwab or from various ETF providers. The performance was quite similar. It’s the asset allocation recipe that drives performance—not where we purchase the ETFs.


ETF-Based Portfolios Using The 7Twelve Model  (

12-Asset Class
7Twelve Model
12 ETFs From Various Providers12 Vanguard ETFs12 Schwab ETFs
Portfolio Aggregate
Annual Expense Ratio
17 bps9 bps11 bps
20-Year Average Annualized Return (2000-2019)6.82%7.26%6.90%


Contact Craig Israelsen at [email protected]