Is the Vanguard Total Stock Market ETF a buy?

Some investors just want it all and can have it if they buy. Vanguard Total Stock Market ETF (NYSEMKT:VTI). That’s just a joke. The real story here is that this highly diversified ETF is a great starting point for new investors and can be used as a foundation for the growth of both your portfolio and your investment knowledge. Here are a few reasons why you might want to buy the Vanguard Total Stock Market ETF.

All, market cap weighted

The Vanguard Total Stock Market ETF is an exchange-traded fund that buys every security available on a U.S. exchange. Currently owns 3,747 shares. This is a number that small investors would be unwise to try to reproduce on their own, and it is extremely difficult to manage. That’s why ETFs like this exist. You can buy all these stocks in one purchase with an expense ratio of just 0.03%. It’s surprisingly cheap.

That said, the Vanguard Total Stock Market ETF is market-cap weighted, so it doesn’t own everything equally. This means that the largest stocks have the most assets invested in them and therefore have the greatest impact on performance. The largest stocks are usually the best performing stocks. However, because the portfolio contains so many stocks, this advantage is somewhat diminished compared to a smaller portfolio. However, it is still important to be mindful of market capitalization weighting.

In summary, the Vanguard Total Stock Market ETF is a great fundamental investment that allows you to simply “own the market.” It doesn’t perform better, but it doesn’t perform worse either. Combine this with a broadly diversified bond ETF and you’ll quickly have a balanced portfolio that only needs to be updated once a year (to bring your stock and bond allocation back in line with your goals). This may be the only stock-focused investment you ever buy.

you’ll probably want to do more

But if you’re like most avid investors, buying the Vanguard Total Stock Market ETF won’t satisfy your desires. You can buy individual stocks or focus on specific sectors. There’s nothing wrong with that. Once you have time to commit to investing, you can sell the Vanguard Total Stock Market ETF and switch to buying stocks or more focused ETFs. It’s like taking off the training wheels and riding a 10-speed bike.

story continues

Or, to change the analogy, you could hold the Vanguard Total Stock Market ETF for the long term. The shift in mindset is to view ETFs not just as an investment training tool, but as the foundation for the rest of your investments. Seeing the world this way, the Vanguard Total Stock Market ETF provides broad diversification and stock exposure, reducing the inherent risk of picking individual stocks. The best part is that you can decide for yourself how much foundation you want to maintain.

For example, if you start investing 100% of your money in the Vanguard Total Stock Market ETF, you might want to carve out 10% and buy individual stocks as you get more comfortable investing. That way, you can learn more without risking upsetting your long-term savings and investment goals. Maybe that 10% will only buy you one or two shares, but so what? Expand your knowledge and hopefully do a little better than average with the Vanguard Total Stock Market ETF. This is what we are doing. As you gain experience, you can increase the percentage you devote to other investments.

But here we have the opposite option. Whenever you feel like you’re taking too much risk on individual stocks, you can sell those stocks and buy more Vanguard Total Stock Market ETF. That’s something you might actually decide to do when you get older and prefer playing golf and spending time with friends and family to playing golf 10,000 times or more. . Or it may be a time of increased complexity in your life, such as the birth of a child or the purchase of a home. The idea behind the Vanguard Total Stock Market ETF is to be the foundation you want it when you want it.

Not suitable for everyone, but a great option

The Vanguard Total Stock Market ETF’s dividend yield is a dismal 1.4%, but that’s about what you’d expect from such a broadly diversified ETF. Therefore, it may not be attractive to income investors. Still, if you think about ETFs correctly, they can be a valuable tool in your investment toolbox as you move from investing beginner to investment expert to retirement and choosing to do something else. This is something every investor should consider having on their wish list, if not their buy list.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns positions in and recommends Vanguard Index Fund and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.

Is the Vanguard Total Stock Market ETF a buy? Originally published by The Motley Fool