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Background
The Vanguard Total Stock Market ETF (VTI) is the ETF version of the world’s largest mutual fund, VTSAX. The fund, as of March 31, 2019 has an astounding $772.7 billion under management and holds 3,615 individual companies. Vanguard is one of the largest investment management companies in the world and is well known for their funds for large net asset values and low cost fund offerings. The fund is appropriate for those who want to own a large, well diversified basket of companies in the U.S. market. In this article, we will break down the characteristics of the fund, who the fund is suitable for, and some reasonable investment alternatives.
VTI Fund Profile
The summary prospectus of VTI describes the principal investment strategies as follows:
The Fund employs an indexing investment approach designed to track the performance of the CRSP US Total Market Index, which represents approximately 100% of the investable U.S. stock market and includes large-, mid-, small-, and micro-cap stocks regularly traded on the New York Stock Exchange and Nasdaq.
The fund also remains fully invested and offers a considerably low expense ratio.
VTI is an ETF which means the minimum investment is only the cost of one share which is approximately $148 (plus transaction costs if applicable). This makes the fund widely available to retail investors as a way to own a piece of the U.S. total market. As an alternative, the Vanguard Total Stock Market Admiral Shares fund (VTSAX) can be purchased as a mutual fund with a minimum $3,000 investment.
VTI holds the all the big names that you may expect a total U.S. market fund to hold in their top 10 largest holdings.
Source: VTI Fund Profile
As shown, the 10 largest holdings of the fund represent approximately 18.6% of the total net assets of the fund. This portfolio allocation, on an individual security basis, does raise the question of concentration risk within these 10 companies. However, the sector diversification that is achieved through these 10 companies is more reassuring as they belong to several different sectors. From a sector diversification perspective, the portfolio composition is show below:
Source: VTI Fund Profile
This portfolio composition reveals that the fund does have some concentration risk in the technology and financial sectors, which make up over 39% of the fund. Based on the recent highs made by many large companies and this sectors, this over-weighting is not a significant surprise. It should also be noted that the weightings of these two particular sectors are not that uncommon when compared to other total U.S. market mutual funds or ETFs.
Performance
VTI’s three year performance chart is provided below. The performance of the S&P 500 has been added for comparative purposes.
Data by YCharts
As shown above, the Vanguard Total Stock Market ETF has tracked the S&P 500 index almost identically over the bull run in the market for the preceding three year period.
Who Should Invest in VTI
VTI is a great way for a passive investor to make one fund purchase and simplify their portfolio. The fund profile notes that VTI “employs a passively managed, index sampling strategy.” The low expense ratio, as discussed below is another benefit for investors who do not want to pay the fees of actively managed funds. VTI is clearly effective at replicating the domestic equity component of a balanced portfolio. As we near all time highs in the S&P 500, further diversification through bonds, international equities and other vehicles would be preferable for many investors.
The overall notion of being a passive investor in a fund like VTI is to buy and hold for the long term and not try to outsmart that market by actively trading a brokerage account. As most retail investors are not able to beat the market return of the long-term, the buy and hold approach in a broad-based large blend fund like VTI is typically recommended for most investors.
There are options available to trade for VTI in both a weekly and monthly duration and $0.05 spreads.
Fees
Per Vanguard, the fund has an expense ratio of 0.04% and the current net assets of the fund are $772.7 billion as of March 31, 2019. This is clearly one of the greatest benefits of the fund as the ultra-low expense ratio allows investors to keep more of their returns and minimizes tracking error. At the current net asset level of the fund, Vanguard would be earning approximately $308M annually for management of the fund.
Distributions
A nice benefit of owning a piece of the entire U.S. market through an ETF like VTI is being able to enjoy the regular dividend distributions in addition to the capital appreciation. The current yield of the fund is 1.89%. Dividends are declared and paid quarterly with the most recent dividends being shown below:
Source: (Vanguard Website )
Alternatives to the Vanguard Total Stock Market ETF
Some alternatives to investing in VTI are provided below. Generally, the ETFs are quite similar, and as such the differentiating factors have been highlighted.
Vanguard S&P 500 ETF (VOO)
This fund is very similar to VTI however it only holds approximately 500 companies versus the 3,700 companies held by VTI. The fees are consistent across both funds at 0.04% so the only difference is the level of diversification between the fund’s holdings. VOO would more close mirror the S&P 500 which VTI is already highly correlated with.
Source: Vanguard VOO Fund Profile
PowerShares FTSE RAFI US 1000 Portfolio (PRF)
PRF holds approximately 1,000 equities that have the highest fundamental score based on the following four factors: cash flow, sales, dividends and book value. The total expense ratio of 0.41% is significantly higher than VTI. The fund is considered a smart beta, which explains the higher expenses.
Source: Invesco PRF Fund Profile
iShares Core S&P Total U.S. Stock Market ETF (ITOT)
This is another fund similar to VTI with fees of 0.03%. The fund holds over 3,500 companies and has a net asset value of over $19M. The sector exposure to technology is a bit higher than VTI at approximately 21%.
Source: iShares ITOT Fund Profile
In addition, as discussed above, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) can be purchased as a mutual fund that mirrors the performance of VTI if that is preferred or if ETFs are not eligible to be purchased within a particular account type.
Overall Takeaway
The Vanguard Total Stock Market ETF is a good investment vehicle to gain exposure to a large basket of U.S. companies in a very cost-effective manner. The simplicity of buying and holding a small number of funds would be very appealing and appropriate for most retail investors. The ultimate decision for the individual investor will be if they want the long exposure to the U.S. equity market, as it approaches all time highs. If so, then VTI is can be effectively utilized as the domestic equity component of a balanced portfolio.
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.
Additional disclosure: This article is for information purposes only. Please do your own research and due diligence and consult a financial advisor and/or tax professional if necessary before making any investment decisions.
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