It's not easy being a professional stock picker. Data shows that the majority of actively managed funds -- that is, funds that buy and sell investments to try to beat the market -- fail to outpace the market's performance over the long term.
Those statistics have resulted in a huge interest in index funds, which passively invest in a certain collection of stocks. These funds don't try to beat the market -- they simply try to track the market's performance. As the old adage goes, if you can't beat 'em, join 'em.
There is one exchange-traded fund (ETF) in particular that investors have been relying on for years to match the market's performance.
The Vanguard Total Stock Market Index Fund ETF (VTI 0.12%) has everything an investor needs to begin beating the experts at their own game.
NYSEMKT: VTI
Key Data Points
Saving time is priceless
Doing your own investment research can take hundreds, if not thousands, of hours of your time. Many find the research enjoyable, but there's no doubt that an fund like Vanguard's Total Stock Market ETF can do all the dirty work for you.
The goal of this fund is to remain as close to 100% invested in the market as possible. It is not trying to time the market, or even pick certain stocks that it believes can outperform others. The composition of the ETF's portfolio mirrors that of the CRSP US Total Market Index, a basket of more than 3,500 stocks of all sizes, including mega-, mid-, small-, and micro-cap companies .
The only buying or selling that Vanguard's Total Stock Market ETF does is to reweight its portfolio to match the underlying index. With very little effort, then, investors can buy the ETF and instantly gain broad exposure to nearly the entire U.S. stock market, with automatic reweighting to ensure consistent and representative exposure. The index is weighted by market cap, however, so there is a disproportionate weighting toward larger companies.
Since 2001, the fund has returned roughly 510%. How many professional stock pickers matched this performance? According to data from S&P Global, less than 7% of actively managed funds were able to beat their benchmark over a 20-year period .
With Vanguard's Total Stock Market ETF, you can beat the experts without sacrificing any of your time to investment research.
Source: S&P Dow Jones Indices LLC, CRSP.
Pay careful attention to fees
When investing in index fund ETFs, one of the most important figures to track is how much the fund charges for expenses.
Actively managed funds require a lot of overhead. Simply paying the salaries of an investment team often requires millions of dollars. This means that, on average, actively managed funds have higher expense ratios (the percentage fee that funds charge you annually to own the fund).
Passive investments like an index fund ETF that don't require any specialized stock pickers are much cheaper to operate, and therefore typically come with lower expense ratios. The Vanguard Total Stock Market ETF, for example, charges a fee of just 0.03% per year. The average expense ratio for similar funds is 0.79% -- more than 26 times higher!
Low fees are a big reason index fund ETFs beat so many actively managed funds over time. Given their low fees, index funds automatically start with an advantage. A fund that charges an expense ratio of 1.03%, for instance, must outperform the Vanguard Total Stock Market ETF by a full percentage point every year simply to match its post-expense performance.
There are many low-cost index fund ETFs today, but Vanguard's funds offers some of the lowest expense ratios in the industry. Because these funds simply track a benchmark, it usually makes sense to avoid funds with higher expense ratios because there is little difference between funds that track the same index.
Of course, some professional stock pickers do end up beating the market, even if the odds are stacked against them. And many people don't mind the time investment of picking their own stocks because it can be an enjoyable and rewarding activity.
Even if you run your own investment portfolio, however, it can make sense to devote a certain percentage of your assets to a proven, low-cost fund like Vanguard's Total Stock Market ETF. This way, you diversify your portfolio while ensuring the odds are better stacked in your favor.
