Investors can benefit from broad portfolios comprising a healthy number of stocks and/or exchange-traded funds (ETFs). A portfolio with depth enables market participants to be both prudent and tactical, potentially allowing the winners in the roster to offset the drag of some of the “turkeys.”
Still, some investors want to set it and forget it with broad, low-cost index funds. On some social media forums, the “kids” call it “VOO and chill” in reference to the Vanguard S&P 500 ETF (VOO +0.89%). For some, it’s a comfortable approach and one that enables them to sleep more easily at night.
This Vanguard ETF is perfect for long-term investors seeking convenient broad market exposure. Image source: Getty Images.
It’s also one embodied by the Vanguard Total Stock Market ETF (VTI +0.92%). This Vanguard fund is the fourth-largest U.S.-traded ETF of any stripe, an ode to its elegant simplicity. But before hitting the “buy” button, investors should understand this ETF’s history.
VTI and chill?
A simple, accurate way to describe the total market ETF is that it’s a blend fund that effectively represents the U.S. equity market as a whole, excluding stocks that don’t trade on major exchanges. Said another way, this ETF is one of the best index funds for some investors because it combines large-, mid-, and small-cap exposure under one umbrella.
That leads to differences between this ETF and an S&P 500-tracking fund, not least of which is that this Vanguard fund holds 3,484 stocks, while an S&P 500 fund holds just over 500. Speaking of differences, the long-term performance gap between this Vanguard ETF and funds dedicated to large- or small-cap stocks is even more important.
Data by YCharts.
As the chart shows, the Vanguard Total Stock Market ETF closely tracks the S&P 500, but it has lagged the index since inception. Some of the gap is attributable to the 21st-century bull markets, which were largely led by large-cap and megacap technology stocks. However, history is on the side of small caps. Though more volatile than their larger peers, small caps have outpaced large caps over extended holding periods, and the data confirming that is a century old.
Investors embracing this Vanguard ETF may eventually enjoy the spoils of its smaller-stock exposure without the risk of holding individual small-cap stocks or small-cap index funds.
This ETF is relevant here and now for other reasons as well. First, with a small number of equities commanding massive percentages of the S&P 500, concentration risk is top of mind for many investors. To be sure, the total market ETF has large weights to famous megacap growth stocks, but its broader lineup reduces concentration.
Second, as measured by the Russell 2000 Index, small caps have trounced the S&P 500 over the past year. If that morphs into a prolonged period of outperformance, the Vanguard ETF could benefit, provided large caps are also moving higher.
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Another historical advantage
One of the biggest attractions of the Vanguard Total Stock Market ETF is its low annual expense ratio. The fund charges just 0.03% per year, or $3 on a $10,000 investment. That’s far below the average fee of 0.72% on competing funds.
That’s so low that there may not be much room for further fee cuts, but history confirms that Vanguard’s low fees save clients significant sums of cash, which adds up in their favor over time.
