Legendary investor Warren Buffett has said several times that for the majority of Americans, passive index fund investing is the best way to invest. One of the most popular index funds in the world is the Vanguard Total Stock Market ETF (NYSEMKT:VTI), and for good reason. Not only does it allow investors to benefit from the performance of the entire stock market, but it does so at a bare minimum of expense to investors.
With that in mind, here's a rundown of what the Vanguard Total Stock Market ETF is and what investors should know before adding it to their portfolio.
About the Vanguard Total Stock Market ETF
The Vanguard Total Stock Market ETF has been in existence since May 2001 and is a passively managed index fund that is intended to replicate the performance of the overall U.S. stock market. Specifically, it tracks the CRSP U.S. Total Market Index, which is composed of stocks of companies of all sizes and investment characteristics.
In all, the fund holds more than 3,500 stocks in its portfolio and has a total of $672 billion of investor assets -- so this is a popular, widely held index fund product.
It's also important to mention that this is a market-cap-weighted index fund, meaning that larger companies make up a larger proportion of the ETF's investments. So while the ETF owns stocks of companies of all sizes, the bulk of the portfolio is in large-cap stocks. Top holdings include companies like Microsoft, Apple, Amazon, Alphabet, and Berkshire Hathaway, just to name a few.
The ETF passes the dividends paid by its holdings to shareholders in quarterly installments. As of this writing (Feb. 5, 2019), the Vanguard Total Stock Market ETF pays a 1.9% dividend yield to shareholders -- but bear in mind that this can fluctuate over time based on the fund's share price as well as the dividend behavior of the underlying stocks it owns.
Vanguard means cheap passive investing
One thing you can count on when buying a Vanguard fund is that your fees will be extremely low, and the Vanguard Total Stock Market ETF is no exception.
The ETF has a rock-bottom 0.04% expense ratio. This means that for every $10,000 that you have invested in the fund, you'll only pay $4 toward management and administrative expenses every year. The overall stock market has historically generated annualized 9% to 10% returns over long time periods, so with the Vanguard Total Stock Market ETF, you'll keep the overwhelming majority of your investment gains.
Who should buy the Vanguard Total Stock Market ETF?
With rock-bottom expenses, the Vanguard Total Stock Market ETF is a great product. It's as good or better than any other total stock market ETF out there.
However, like most investments, it isn't necessarily the right choice for everyone. The Vanguard Total Stock Market ETF is a great choice for people who want to invest in the stock market for the long term but don't have the time, knowledge, and/or desire to invest in individual stocks.
If you do have those characteristics, a passive index fund like this may not be the best choice for you. However, the Vanguard Total Stock Market ETF is a great way to put your investing on auto-pilot and to let the long-term compounding power of the U.S. stock market grow your nest egg.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of Apple and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Berkshire Hathaway (B shares). The Motley Fool owns shares of Microsoft and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.