Vanguard is a massive investment management company, offering mutual funds, exchange-traded funds (ETF), 401(k) plans, and many other financial products and tools. The company's founder, Jack Bogle, popularized low-cost passive investing through index funds.
Warren Buffett is a big fan of Bogle, famously saying, "If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle."
You may assume that the Vanguard S&P 500, which mirrors the performance of the S&P 500, is the company's largest mutual fund. And with $851 billion in assets combining standard open-end mutual fund and ETF assets, it is certainly up there. But Vanguard's largest fund is, by far, Vanguard Total Stock Market (VTI 0.93%) with a staggering $1.27 trillion in net assets combining ETF and traditional mutual fund shareholders.
The ETF's all-time intraday high of $244.06 occurred on Jan. 4, 2022. But the fund has had an epic year, gaining just shy of 20% year to date to put it within 10% of its all-time high.
Here's why the Total Market ETF is, in many ways, better than an S&P 500 index fund and why the ETF could be worth buying now.
Image source: Getty Images.
A different way to diversify
The S&P 500 has produced an average annual return of around 9% to 10% over the long term and has proven to be a fantastic tool for building generational wealth. However, the characteristics of the S&P 500 lead to advantages and drawbacks.
The most obvious is that just shy of 28% of the S&P 500 is concentrated in the "Magnificent Seven" stocks -- Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. This year, those stocks have crushed the market and carried the index. But if those stocks underperform, it's going to hurt the index's performance.
The rest of the S&P 500 is in large-cap companies, many of which are slow-growing, stodgy, dividend-paying companies. That's all well and good for some investors. But folks looking for more growth often turn to the Nasdaq-100 or a growth fund to take on more risk with more potential reward.
Vanguard Total Market holds 3,793 stocks and has less exposure to technology/communications, consumer discretionary, and financials than Vanguard S&P 500. But overall, the breakdown by sector is quite similar between the two funds.
|
Sector |
Vanguard Total Stock Market ETF |
Vanguard S&P 500 ETF |
|---|---|---|
|
Technology/communications |
32.6% |
36.8% |
|
Consumer discretionary |
14.1% |
10.6% |
|
Industrials |
12.8% |
8.3% |
|
Health care |
12.5% |
13.2% |
|
Financials |
10.5% |
12.7% |
|
Consumer staples |
5.1% |
6.6% |
|
Energy |
4.8% |
4.5% |
|
Real estate |
2.8% |
2.4% |
|
Utilities |
2.8% |
2.5% |
|
Basic materials |
2% |
2.4% |
Data source: Vanguard.
The key difference is that Vanguard Total Market holds more stocks and has a larger number of names representing a sector. A good example is industrials. Not only does Total Market have more exposure to industrials than the S&P 500, but it also includes many smaller industrial companies you've probably never heard of. The same goes for every sector. In this way, an investor is getting more exposure to mid-cap and small-cap stocks while still focusing on the sectors that are driving the economy.
Ultra-low fees
Perhaps the best quality about the Total Market ETF is that you can invest in it with as little as $1 at many brokers, and the expense ratio is just 0.03%. Of the fund's $1.27 trillion in assets, 0.03% equates to $3.81 billion in fees for Vanguard per year -- not too shabby. But for the individual investor, it's a negligible cost. It means $20,000 invested in the fund incurs a mere $6 annual fee. That's about as much as it cost to trade a stock from your typical broker 15 years ago.
For complete exposure to the U.S. stock market, there's really no better option than Vanguard Total Market.
Some factors worth considering
Although the fund holds a boatload of stocks, it's not as diversified as you may think. If you scroll through the list of holdings, you may notice that the weightings get minuscule fairly quickly. For example, the 501st-ranked stock out of the 3,756 fund holdings makes up just 0.03% of assets. Get beyond the first 1,261 stocks, and each holding has less than 0.01% of the fund's assets invested in it.
There may be a lot of stocks in the fund, but the last 2,500 or so holdings are fairly small companies, and the fund offers investors very little exposure to them. To be fair, it's not necessarily a good idea to have too much exposure to thousands of small companies you don't know about. If there is a mid-cap or small-cap company that stands out, then it makes more sense to research and invest in it directly.
In this vein, the Total Market fund does what it is supposed to do. It's giving the S&P 500 companies a lot of weight, and it's providing a taste of the rest of the market without exposing investors to unwanted risk.
A foundational holding
On the surface, Vanguard Total Market is quite different than the S&P 500. But it follows the performance of the S&P 500 very closely, which makes sense given the weightings and breakdown by sector.
The Total Market fund is a no-brainer compared to an S&P 500 index fund because the fee is the same as an S&P 500 index fund. So you're paying the same price for more diversification, which is the main goal of index investing to begin with.
Vanguard Total Market is a "harmless" way of buying a tiny sliver of nearly every company in the U.S. stock market. The fund may not break its all-time high in the short term. But it has what it takes to be an excellent investment over time.
