There are several reasons why Vanguard Total Stock Market Index (MUTF:VTSMX) is the biggest mutual fund in the world.
And those same qualities are also what make VTSMX the best core stock holding an investor can buy.
The path that leads most investors to Vanguard Total Stock Market is one of humility: If you can’t beat the market, join it it. This is the philosophy upon which Jack Bogle built Vanguard.
By virtue of passive management, Vanguard can keep expenses extremely low, which plays a central role in long-term out-performance of their index funds over actively-managed funds.
Bottom line: If most investors lose to the market over time with active management strategies, it is wise to simply “buy the market” in a passively-managed fund like VTSMX.
Thus if you want to buy the entire stock market and not just a fraction of it, you buy the Vanguard Total Stock Market fund.
Advantages of Vanguard Total Stock Market Index
There are a handful of qualities that make VTSMX an outstanding long-term core holding. Reasons to own Vanguard Total Stock Market include:
- Diverse holdings: VTSMX is designed to provide investors with exposure to the entire U.S. equity market, including small-, mid- and large-cap companies across both growth and value. The fund tracks the CRSP US Total Market Index, representing nearly 100% of the investable U.S. equity market. The fund is cap-weighted, which means the largest stocks by capitalization represent more of the portfolio than smaller capitalizations. Top holdings of VTSMX naturally include the biggest stocks out there, then — Apple Inc (AAPL), Exxon Mobil Corporation (XOM), and Microsoft Corp (MSFT).
- Low expenses: The passive nature of VTSMX means there is no need for higher relative research and trading costs necessary for active management. The expense ratio for VTSMX is 0.17%, which is extremely low by industry standards and adds up to just $17 on every $10,000 invested. Investors can also buy the Admiral share class, Vanguard Total Stock Market Index (MUTF:VTSAX), which has an even lower expense ratio of 0.05%. The average expense ratio for large-cap stock funds is higher than 1.00%. To buy the exclusive VTSAX, investors need to have a minimum initial investment amount of $10,000.
- Low turnover: A primary reason for the Total Stock Market fund’s low expenses is the low turnover of 0.03%. turnover is the percentage of the fund’s holdings that were replaced with a different investment (or “turned over”) during the previous year. Actively-managed stock funds often have turnover ratios that exceed 50%, which can result not only in higher fees but worse performance in the long-term.
- Tax-efficiency: A direct result of low turnover is a reduction in taxes passed through to the investor. When mutual funds sell holdings at a price higher than than the purchase price, it produces a capital gains tax, which is then passed along to investors in the form of “capital gains distributions.” If you hold a stock fund in a taxable account, you’ll pay taxes on these distributions. Therefore, assuming you like to minimize taxes, you’ll want a tax-efficient fund like VTSMX.
The interconnected advantages of buying and holding a fund like VTSMX are clear. The diversification, low expenses, low turnover, and tax-efficiency all build on each other to produce long-term returns that out-perform the category averages.
As of this writing, the 10-year performance rank for VTSMX was 14, which means its returns beat 86% of large-cap blend mutual funds.
Vanguard Total Stock Index Fund – Who Should Own It?
Vanguard Total Stock Market Index consists of 100% stocks. Therefore, it is suitable for investors with intermediate- to long-term investment horizons. That is, at least 3 years. These kind of mutual fund investors can tolerate fluctuations in principal and are in investments like VTSMX for the long haul.
Compared to an S&P 500 Index fund, Vanguard Total Stock Market has slightly higher market risk because it holds small-cap stocks and mid-cap stocks, where as the S&P 500 is 100% large cap. However, the higher market risk will normally translate into slightly higher long-term returns for patient investors.
Although the Total Stock market fund is diversified in itself, the best use of VTSMX is as a core holding in a portfolio that will include other asset classes, such as bonds or cash, and other stocks, such as foreign stock funds or sector funds. In such a “core and satellite” portfolio structure, the Total Stock Market Index fund would represent the largest percentage, such as 30-50%, of the portfolio with other funds representing smaller percentages.
Past performance is no guarantee of future results. But there is no question that higher costs are a drag on performance, which when combined with human fallibility associated with active management, the low-cost funds like Vanguard Total Stock Market Index will prove to be the preferred choice of investors for a long time to come.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. His No. 1 holding is his privately held investment advisory firm. Under no circumstances does this information represent a recommendation to buy or sell securities.