One of the first bits of advice that most people hear when they start investing is “diversify.” Buying a diversified portfolio with lots of different stocks can help manage your risk and improve your chances of growth and success as a long-term investor.
But what’s the best way to diversify for the long run? For me, it’s the Vanguard Morningstar Total Stock Market ETF (NYSEMKT: VTI). This fund owns 3,531 stocks of all sizes (small, mid, and large cap). It represents basically the entire U.S. stock market. And it charges a rock-bottom low-price expense ratio of 0.03%.
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This is my “set it and forget it” U.S. stock ETF. It’s the largest piece of my portfolio. I buy more shares of it every month on every payday.
But over the past 10 years, this total stock market ETF has been outperformed by the S&P 500 index, which tracks the 500 largest companies in America.
Which is better, owning VTI or an S&P 500 ETF? I’m going to keep buying the Vanguard Morningstar Total Stock Market ETF, because I believe owning 3,531 U.S. stocks will be a better bet than “only” 500 stocks in the long run.
Let’s look at why I’m sticking with VTI for the long run.
Vanguard Morningstar Total Stock Market ETF: Just buy all the stocks
The Vanguard Morningstar Total Stock Market ETF doesn’t make you choose between the S&P 500 and other smaller companies. It lets you own basically the entire U.S. stock market. Since the 500 largest companies make up such a large share of the VTI portfolio, this fund tracks the performance of the S&P 500 closely. The top stock holdings in VTI are the same major tech names you’d see in an S&P 500 ETF:
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Nvidia: 6.3% of the fund
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Apple: 5.8%
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Alphabet: 5.15% combining Class A and Class C shares
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Microsoft: 3.8%
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Amazon: 3.2%
But because the Vanguard Morningstar Total Stock Market ETF also owns thousands of smaller companies, it doesn’t deliver exactly the same returns as the S&P 500. In the past year, VTI has outperformed the S&P 500. What if that trend continues?
I believe it’s a good idea to own all these other mid- and small-cap stocks. In case different parts of the stock market outperform the S&P 500 in the future, this fund will ideally capture those gains.
Why buy VTI or an S&P 500 ETF?
In the big picture, buying S&P 500 ETFs like the Vanguard S&P 500 ETF (NYSEMKT: VOO) is often a great move for long-term investors. Even if those are the only stocks you own, you might be fine and see strong investment returns.
