Vanguard Total Stock Market ETF (NYSEMKT:VTI) is an interesting option for investors looking for the ultimate "punt" stock play. In fact, in some ways it is even better than an S&P 500 Index fund. The only problem is what Vanguard Total Stock Market ETF isn't. Here's what you need to know before buying this ETF.

The basics

Vanguard Total Stock Market ETF is an exchange-traded fund, which means it is a pooled investment vehicle like a mutual fund but it trades all day long like a stock. The expense ratio for this ETF is an ultra low 0.03%, so it is incredibly cheap to own. To put some numbers on that, for every $10,000 invested in the fund, you will pay Vanguard a miserly $3 -- that's very cost effective. The fund has nearly $900 billion in assets, so it is a big player in the ETF space and isn't likely to get shut down because of a lack of investors (something that happens quite often to niche ETFs that don't gain traction). 

Red yellow and blue color blocks with the acronym ETF on them and the words exchange traded fund

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The ETF itself is meant to track, as its name implies, the entire U.S. stock market. To that end, it owns roughly 3,500 stocks. However, it is market-capitalization-weighted, which means that larger stocks get more of the fund's assets. The 10 largest holdings account for around 20% of the overall portfolio. So it is diversified, holding small-cap, mid-cap, and large-cap stocks. But large-cap stocks are still going to be the biggest component of the fund. In fact, there will be material overlap between this fund and, say, an S&P 500 Index offering. 

Vanguard Total Stock Market ETF's dividend yield is around 1.8%, which isn't much to write home about, but is in line with the market's current low yield. Over the trailing three-, five-, and 10-year periods through year-end 2019, the fund returned 14.5%, 11.2%, and 13.4%, roughly tracking along with Vanguard S&P 500 ETF (NYSEMKT:VOO). Vanguard Total Stock Market ETF's standard deviation, a measure of volatility, is just slightly higher than that of Vanguard S&P 500 ETF, which makes sense given the added mid-cap and small-cap exposure.

How to use it

Vanguard Total Stock Market ETF is a solid choice for investors who don't want to think about picking stocks or sectors. Although it would be hard to argue that it is materially better than an S&P 500 Index fund, it does offer broader exposure to the market. There is an added value in that, though it will be at the margins and is unlikely to lead to material outperformance relative to an S&P 500 tracking ETF. But because of the small-cap and mid-cap exposure, Vanguard Total Stock Market ETF is really the ultimate punt for those who just want to know they own "U.S. stocks."

This is important, because Vanguard Total Stock Market ETF really isn't meant to be owned in exclusivity. It is an asset allocation tool, intended to be used in conjunction with other pooled investment products. It fills the U.S. stocks bucket in one quick move. What it leaves open is the bond and foreign stock buckets. So you might pair it with Vanguard Total Bond Market ETF (NASDAQ:BND) to create a diversified, U.S.-focused portfolio. The only question you have to ask is how much of each you want to own -- a typical conservative allocation would be 60% Vanguard Total Stock Market ETF and 40% Vanguard Total Bond Market ETF.

VTI Chart

VTI data by YCharts

If you want to take your portfolio a step further, you could add Vanguard Total International Stock Index Fund ETF (NASDAQ:VXUS). That would, as the name suggests, provide broad international diversification. You might allocate something like 20% of the portfolio to this ETF, so your three-ETF portfolio would consist of 40% Vanguard Total Stock Market ETF, 20% Vanguard Total International Stock Index Fund ETF, and 40% Vanguard Total Bond Market ETF. If you wanted to get really fancy, you could even add Vanguard Total International Bond Index Fund ETF (NASDAQ:BNDX) to the mix, peeling off some of the portfolio's bond component (maybe 10 percentage points or so).

Clearly these are just rough suggestions -- every person is different. The bigger point is that few should consider Vanguard Total Stock Market ETF to be a complete portfolio in and of itself. It is not; it simply provides highly diversified U.S. stock exposure. To create a diversified portfolio, you really need to add other securities to the mix, most notably bonds (but perhaps also international stocks and bonds). 

Is it worth buying?

Deciding if Vanguard Total Stock Market ETF is a buy isn't easy here, because it depends on a lot of factors. For example, if the stock market is richly valued, as it is today, then Vanguard Total Stock Market ETF will be richly valued. If the market corrects, so will this ETF. That said, if you are looking to establish a long-term investment plan that you will stick with through thick and thin (focusing your effort on saving money as opposed to picking individual investments), then Vanguard Total Stock Market ETF is a great option. Just go in knowing that you are tracking the market, for better and worse, and that you should add complimentary ETFs if you want to create a complete portfolio.