Vanguard Total Stock Market: The World’s New Favorite Fund

Vanguard Total Stock Market Index Fund (VTSMX) has just overtaken the Pimco Total Return Fund (PTTAX) in terms of asset size — and that’s another big signal that investors are warming up to the notion of greater exposure to equities.

Or … is this shift into the Vanguard fund more of a realization that bond funds will be facing an uphill battle with the prospect of rising interest rates in the future?

Probably a little bit of both.

Fund flow data shows an increasing amount of money has flowed into stock funds in general during the past few months. This paired with the fact that more than $37 billion has flowed out of Pimco Total Return has created an opportunity for Vanguard to claim ownership of the world’s largest mutual fund.

However, investors coming to the party now are arriving in the fifth year of this bull market, with much of the fun, excitement and profits possibly already behind us. The contrarian in me finds this all a bit disturbing as this bull market continues at a torrid pace and without a meaningful correction so far in 2013.

So, let’s talk a closer look at why this Vanguard fund has attracted the attention and the assets:

Breaking Down Vanguard Total Stock Market

Vanguard Total Stock Market Index clearly represents what amounts to a “bundle” approach to equity investing — and a large bundle it is, with assets of $251 billion as of the end of October.

VTSMX tracks the MSCI U.S. Broad Market Index, which means it owns a generous portion of large-cap stocks that most people would consider household names. Of course, it also gives you exposure to most all other areas of the domestic market — presently, 19% of the fund is in midcap stocks, and 8% of the portfolio is in small- and microcap companies. All told, the fund currently holds more than 3,600 stocks.

Financials are currently 18% of the portfolio, including top-10 holdings Wells Fargo (WFC) and Berkshire Hathaway (BRK.B). Tech stocks take up another 14%, including large positions in Apple (AAPL), Microsoft (MSFT) and Google (GOOG). Exxon Mobil (XOM), Johnson & Johnson (JNJ), General Electric (GE), Chevron (CVX) and Procter & Gamble (PG) fill out the rest of the top 10 holdings.

This Vanguard fund is up an impressive 25% YTD, which is about 1 percentage point more than Vanguard 500 Index Fund (VFINX) over the same period. The two funds are similar, but the exposure to small- and midcap names has helped VTSMX achieve a performance edge. Over the past five years, Vanguard Total Stock Market has gained 16.5% annualized, good enough to rank it in the top 15% of its Morningstar large-blend category.

As is typical with products from Vanguard, expenses are rock-bottom. VTSMX charges just 0.17% annually, or $17 per $10,000 invested.

An account can be started with $3000, or you may step up to Admiral Shares (VTSAX) in this fund for just $10,000. Electing this option means that expenses drop to a miniscule 0.05% annually, or $5 per $10,000 invested.

As of this writing, Bill Wysor did not hold a position in any of the aforementioned securities.

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