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Is Vanguard Total Stock Market ETF a Buy?

Some investors just want everything — and they can have it if they buy Vanguard Total Stock Market ETF (NYSEMKT: VTI). That’s only sort of a joke. The real story here is that this highly diversified ETF is a great starting point for new investors and can be used as a foundation for growth both in your portfolio and in your investment knowledge. Here are some reasons why you might want to buy Vanguard Total Stock Market ETF.

Everything, market cap weighted

Vanguard Total Stock Market ETF is an exchange-traded fund that buys every security that can be purchased on U.S. exchanges. It currently holds 3,747 stocks. That’s a number that no small investor would be wise to try to replicate on their own — it would simply be too hard to manage. That is why an ETF like this exists. With one single purchase, you can get exposure to all of those stocks for an expense ratio of just 0.03%. That’s shockingly cheap.

A person stacking rocks.

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That said, you don’t own everything equally with Vanguard Total Stock Market ETF because it is market cap weighted. That means that the largest stocks will have the biggest impact on performance because they have the most assets invested in them. The largest stocks are usually the best-performing stocks. With so many stocks in the portfolio, however, the benefit of this is muted somewhat relative to smaller portfolios. But market cap weighting is still important to keep in mind.

All in, Vanguard Total Stock Market ETF is a great foundational investment that allows you to just “own the market.” You won’t outperform, but you won’t underperform, either. Pair it with a broadly diversified bond ETF, and you have a quickly balanced portfolio that only needs updating once a year (to bring the stock and bond allocation back in line with your targets). This could be the only stock-focused investment you ever buy.

You’ll probably want to do more

If you are like most avid investors, however, buying Vanguard Total Stock Market ETF won’t satisfy your desires. You’ll want to buy individual stocks or highlight specific sectors. There’s nothing wrong with that. Once you’ve gotten a little time investing under your belt, you could sell Vanguard Total Stock Market ETF and shift to buying stocks and more focused ETFs. That’s like taking the training wheels off and getting on the 10-speed bike.

Or you can change the analogy and keep Vanguard Total Stock Market ETF for the long term. The shift in mindset is to look at the ETF not as just an investment training tool but as a foundation for the rest of your investments. In this way of seeing the world, Vanguard Total Stock Market ETF provides broad diversification and stock exposure that helps to reduce the inherent risk of choosing individual stocks. The best part is that you get to decide how much of a foundation you maintain.

For example, if you started with 100% of your assets in Vanguard Total Stock Market ETF, you might choose to carve out 10% to buy individual stocks once you got more comfortable with investing. That would let you learn more without taking the risk of upending your long-term saving and investing goals. Maybe you can only reasonably buy one or two stocks with that 10%, but so what? You are trying to expand your knowledge and, hopefully, do just a little better than the average you are wedded to with Vanguard Total Stock Market ETF. As you get more and more experience, you can increase the percentage you dedicate to other investments.

But there’s a reverse option here. Anytime you feel like you are taking on too much individual stock risk, you can just sell those stocks and buy more Vanguard Total Stock Market ETF. That’s something that you might actually decide to do as you get older and prefer to play golf and spend time with friends and family rather than poring over 10Ks. Or it could be during periods of life when complexity increases, like having a child or buying a home. The idea is that Vanguard Total Stock Market ETF is the foundation that you want it to be when you want it to be there.

Not for everyone, but a great option

Vanguard Total Stock Market ETF has a miserly 1.4% dividend yield, which is about what you would expect for such a widely diversified ETF. So, income investors might not find it appealing. And yet, if you think about the ETF the right way, it could be a valuable tool in your investment toolbox as you journey from investment novice to investment expert to retired and choosing to do other things. That’s something that every investor should consider keeping on their wish list, if not their buy list.

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Reuben Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.

Is Vanguard Total Stock Market ETF a Buy? was originally published by The Motley Fool

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