VTI Is Down From Its High, but Its 52-Week Range Tells a Different Story. Here Is What Long-Term Investors Should Make of It

The geopolitical conflict unfolding in the Middle East has upended the global energy market. It has also increased investor concerns about economic growth, with Wall Street clearly wondering if high oil and natural gas prices could tip the world into a global recession. Stocks have pulled back, with Vanguard Total Stock Market ETF (VTI +0.16%) down roughly 6% from its 52-week high. What should investors make of that drop?

What does Vanguard Total Stock Market ETF do?

To set a baseline, Vanguard Total Stock Market ETF provides the broadest possible exposure to U.S. stocks. It effectively owns all of the investable stocks traded on U.S. exchanges. That said, it uses a market-cap-weighted methodology, so the largest companies have the greatest impact on the exchange-traded fund’s (ETF’s) performance. That’s how the real world works, but it also has broader implications.

For example, the top 10 holdings of Vanguard Total Stock Market ETF are exactly the same as the top 10 holdings of Vanguard S&P 500 ETF (VOO +0.11%). The S&P 500 index is a curated list of economically important companies used as a gauge of market performance. The two ETFs actually perform very similarly over time.

However, it is notable that Vanguard S&P 500 ETF’s technology exposure is roughly 33% of assets, while Vanguard Total Stock Market ETF’s exposure is just over 36%. Adding an extra 3,000 or so stocks does lead to some minor differences. The biggest difference is Vanguard Total Stock Market ETF’s exposure to smaller and mid-cap stocks. That exposure, however, because of the market-cap-weighted approach, isn’t as large as you may expect. Large-cap and mega-cap stocks make up roughly 70% of the portfolio, with medium-cap stocks at roughly 20% and small- and micro-cap stocks rounding out the portfolio.

Vanguard Total Stock Market ETF hasn’t fallen very far

The big takeaway so far is that Vanguard Total Stock Market ETF is only slightly different from the S&P 500 index. Both indexes are still trading near all-time highs, despite the recent market pullback. In fact, Vanguard Total Stock Market ETF is still up around 16% over the past year.

That means the drawdown in price has left it only 6% below its 52-week high and 6% below its all-time high. Vanguard Total Stock Market ETF’s average price-to-earnings ratio remains fairly lofty at 26.9x, just shy of the S&P 500’s 27.6x. Vanguard Total Stock Market ETF’s price-to-book ratio is also on the high side, at 4.6x, just a touch below the S&P 500’s 5.1x.

All in, with Vanguard Total Stock Market ETF’s price still sitting within striking distance of its 52-week high, it is hard to suggest that it presents a compelling value opportunity. The current drawdown hasn’t even reached correction territory (a 10%+ decline), let alone bear-market territory (a 20%+ decline).

Vanguard Total Stock Market ETF could have further to fall

Bear markets and recessions are normal parts of the market and the economy. If you are a long-term investor, you need to be prepared for deep and sometimes sudden drawdowns. If you are feeling nervous about the current sell-off in Vanguard Total Stock Market ETF, you need to put what is a fairly minor drop into a larger context.

When you step back and look at the big picture, Vanguard Total Stock Market ETF is still flying high, and its valuation still looks a bit stretched. That’s not meant to suggest that it couldn’t resume its upward climb. However, you need to recognize the possibility that the ETF may still have further to fall.