Countless investors rely on exchange-traded funds to get the stock market exposure they want and need. For those seeking to track a market index composed of hundreds of stocks, it would be impractical to try to buy every single individual stock in the index and track it in your portfolio. ETFs made the job a lot easier, as the fund manager takes care of all that buying and selling for you. All you need to do is invest in shares of the ETF, pay a modest annual expense ratio, and earn the returns of whatever benchmark the fund has chosen to follow.
However, one key question that investors have to answer is just how much exposure to stocks they want. In order to diversify your portfolio properly, it's important to have a fund that owns more than just a few different stocks. Yet even if you do own a fund with hundreds of different holdings, you still have to ask yourself whether that ETF actually gives you complete exposure to all the different types of companies you want.
One Vanguard ETF took a step back and saw what many of its rivals' ETFs were concentrating their efforts on for investors. It chose to go a step further, and it has made all the difference for its shareholders. In this three-part series for the Voyager Portfolio, you'll learn more about the Vanguard Total Stock Market ETF (VTI 1.21%) and how one simple decision marked a revolutionary change for the industry.
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It's easy to invest in proven winners
During March, the Voyager Portfolio has looked at two giants of the ETF industry. The SPDR S&P 500 ETF (SPY 1.23%) was the first ETF to list shares on U.S. markets. The Invesco QQQ ETF (QQQ 1.32%) concentrated on the particular subset of companies that happened to list on the Nasdaq stock market.
Both of these funds have something in common. Their goal is to track indexes that exclusively hold large-cap stocks. And indeed, when you look at their holdings, you'll notice that a huge percentage of their assets go toward buying just a handful of stocks. Most of those stocks are the tech leaders that have grown their way to market capitalizations of $1 trillion or more.
Owning large-cap stocks has been a great way for investors to earn strong returns to help reach their financial goals. But it's not the only way. Indeed, historically, stocks of companies that haven't yet achieved large-cap status have on average performed even better than large-caps. That means that there's a huge gap in the coverage of the stock market that owners of the SPDR S&P 500 ETF or Invesco QQQ ETF need to fill if they want to have a truly diversified portfolio.
Looking beyond the stocks you already know
The Vanguard Total Stock Market ETF chose to adopt a strategy that was more inclusive than its peers. Rather than investing solely in large-cap stocks, it chose to track an index that covers a much wider swath of the stock market. The CRSP U.S. Total Market Index was designed to represent 100% of the investable equity market for U.S. stocks.
As a result, the Vanguard Total Stock Market ETF looks a lot different from its big-league peers. It owns roughly 3,500 stocks. The average market capitalization for each company is $19.5 billion, but half of the stocks in the index have market caps of less than $1.311 billion. It even includes companies with market caps as small as $4 million.
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Key Data Points
To be clear, Vanguard Total Stock Market ETF doesn't go overboard with its spicing of smaller companies. You'll still get over 70% of your money invested in large-cap companies. But about 20% of the portfolio goes toward mid-cap stocks. Another 6% gives you some small-cap exposure, and roughly 2% of the money you invest gets spent buying shares of true micro-cap stocks.
Having more diversification is great, but has it led to better performance for its shareholders? The next article in this series on the Vanguard Total Stock Market ETF looks more closely at this question.
