Vanguard Total Stock Market Index ETF (VTI 1.28%) is an interesting exchange-traded fund (ETF). It isn't meant for investors looking to find the next hot stock. It is designed for investors who recognize the difficulty of that goal. Here's why long-term investors might want to consider adding a broad-based ETF like this to their portfolio.
You'll own everything
Vanguard Total Stock Market Index ETF basically owns all of the stocks that trade in the U.S. market. It uses a market-cap-weighted approach, so the largest companies have the greatest impact on performance. That's basically how the economy works, so this weighting methodology makes sense. Right now, some of the biggest holdings are the names you would expect, including Nvidia, Apple, Microsoft, Amazon, and Alphabet.
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However, the expansive stock exposure means you'll own whatever hot stocks are leading the market at any given time. There's no need for you to try to pick and choose the winners, as they change over time. They're in the portfolio already. The key benefit is that your performance will be exactly in line with the market because you own the market.
One of several broad market options
The interesting thing about Vanguard Total Stock Market Index ETF is that it is one ETF in a suite of broad-market options. The others are Vanguard Total Bond Market ETF (BND 0.29%), Vanguard Total International Stock ETF (VXUS 1.77%), and Vanguard Total International Bond ETF (BNDX 0.28%). They all basically do the same thing: buy everything in the relevant investment universe.
NYSEMKT: VTI
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They are powerful investment tools because they each assure you that you won't underperform the relevant markets. You could easily build a portfolio using just these four ETFs if you wanted, simply picking an allocation for each one that makes sense for your risk profile and time horizon. But step back and think about the flexibility these ETFs can offer with regard to diversification.
What if you aren't comfortable buying international stocks? Instead of ignoring the rest of the world, you can simply buy the Vanguard Total International Stock ETF. That single move will likely help to smooth out your performance over time, since foreign stocks often perform differently from domestic ones.
NASDAQ: BND
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And if navigating the bond market isn't your cup of tea, well, you can just add Vanguard Total Bond Market ETF and Vanguard Total International Bond ETF to your portfolio. Bonds help to stabilize a portfolio's performance because they tend to provide more consistent returns over time.
But don't stop there. You can also use these ETFs as core holdings to which you add investments in only your highest conviction investment ideas. For example, if you only really like investing in real estate investment trusts (REITs), you can build a core portfolio with these four ETFs. Then you can comfortably peel off a portion of your assets and dedicate that cash to the REITs you love. Think of it as a core-and-explore approach, with the stability offered by these diversified ETFs allowing you to focus your efforts in specific investment niches.
Could broad-based ETFs make investing fun again?
The effort needed to build and monitor a diversified portfolio can quickly turn investing into a difficult chore. However, if you use broadly diversified ETFs, you can change the equation and make investing enjoyable. Indeed, if you use these ETFs in the right way, you can spend your investment time on the things you love to do. And if you don't like investing at all, well, they can be valuable tools for that, too.
