Is Vanguard Total Stock Market ETF a Buy? | The Motley Fool (2024)

Investors looking for an easy way to add U.S. equity exposure to their portfolios will probably find Vanguard Total Stock Market ETF (VTI 0.70%) of interest. That said, while it does some things very well, it does others rather poorly. It won't be the best option for all investors.

Here's what you need to know.

What is Vanguard Total Stock Market ETF?

With $1.4 trillion in assets, Vanguard Total Stock Market ETF is a huge fund. That's extra good for investors because the costs of operating the exchange-traded fund (ETF) get spread over a large base of assets. And that keeps the expense ratio low for everyone. At 0.03%, this ETF's expense ratio is practically nonexistent. To put a number on that, it would cost you $0.30 per $1,000 invested annually to own this fund. That's dirt cheap.

Of course, when you dig into Vanguard Total Stock Market ETF, it really isn't doing anything exciting. It tracks the CRSP US Total Market Index, which "represents 100% of the US investable equity market." It is market-cap weighted, so the largest companies make up the largest percentage of the ETF. And the index is rebalanced quarterly.

In short, if you want exposure to U.S. equities as you build an asset-allocation-driven portfolio, this is a good choice. It would also work well if you were to take a balanced investment approach, splitting assets between, say, just stocks and bonds. But, like all investments, Vanguard Total Stock Market ETF isn't perfect.

The limitations of owning everything

While the ETF's goal of, basically, owning every stock you could possibly buy is simple, it won't fit the needs or desires of every investor. As a quick example, Vanguard Total Stock Market ETF's dividend yield is around 1.4%. If you are trying to build a portfolio that generates income you can live on in retirement, well, that won't get you very far. You'll be better off looking at equity ETFs focused on owning dividend stocks.

But that isn't the only issue to consider. What if you have a value focus? Or a growth focus? Or, frankly, any focus at all? You probably won't be happy owning Vanguard Total Market ETF because it simply won't fit your investment temperament.

It isn't meant to. In fact, an S&P 500 Index ETF might even be preferable for broad equity market exposure since that index is actually created to represent the broader economy. Vanguard Total Market ETF just buys any stock that can be bought without any discrimination whatsoever.

And then you need to consider the weighting methodology. While market-cap weighting is fairly common, it isn't the only option. Some investors prefer equal weighting, meaning all holdings can contribute equally to performance. Some dividend ETFs, meanwhile, are weighted based on dividend yield. With market-cap weighting, the largest companies have the biggest impacts.

VTI data by YCharts.

These aren't minor issues. As the chart above shows, SPDR S&P 500 ETF (NYSEMKT: SPY) has outdistanced Vanguard Total Market ETF over the past decade. And while Invesco Equal Weight S&P 500 ETF (NYSEMKT: RSP) has lagged over that span, particularly badly of late, that actually highlights that a small number of large companies have been driving the broader market higher. If that changes, the two market-cap-weighted indexes would likely underperform the equal-weighted option. Suffice it to say, nuances matter.

Make sure it fits your needs

There's nothing wrong with Vanguard Total Stock Market ETF. It does exactly what it sets out to do, and it does so in a very cost-effective manner. The big thing that you need to figure out is whether what this ETF does actually works for your needs and, perhaps just as important, with your personality. If it doesn't, you may sell it at the first sign of trouble and not get the long-term benefit of having equities in your portfolio.

In the end, that's the goal of the ETF: to provide the broadest possible exposure to the U.S. equity market. If that isn't what you want, don't buy it.