Funds

VTI: This Vanguard Fund Is a One-Stop Shop for All US Stocks


Key Morningstar Metrics for Vanguard Total Stock Market ETF

  • Morningstar Medalist Rating: Gold
  • Process Pillar: High
  • People Pillar: Above Average
  • Parent Pillar: High

Vanguard Total Stock Market ETF VTI offers cost-efficient, well-diversified exposure to the entire US stock market—a recipe for success over the long run.

The fund tracks the CRSP US Total Market Index, which represents approximately 100% of the investable US opportunity set. The index weights constituents by market cap after applying liquidity and investability screens to ensure the index is easier to track.

Market-cap weighting forms the bedrock of this strategy, which harnesses the market’s collective wisdom of each holding’s relative value with the added benefits of low turnover and trading costs. It’s a sensible approach because the market tends to do a good job pricing the stocks that make up the bulk of this portfolio. Larger stocks attract widespread investor attention such that prices quickly reflect new information.

The index includes small- and micro-cap stocks, which improve the end portfolio’s diversification and can provide a performance edge when small caps rally, as they did in the fourth quarter of 2020. They tend to be more volatile than large-cap stocks, but the impact is minor given that they make up less than 10% of the portfolio.

This total-market fund mitigates transaction costs because it isn’t forced to buy or sell stocks when they move across segments. Still, a small amount of turnover can occur at the lower rungs of the portfolio. The index implements buffer rules around its lower market-cap boundary to limit unnecessary turnover, since dealing in thinly traded micro-caps can increase transaction costs. The index further reduces trading costs by spreading rebalancing trades over several days to limit market-impact costs.

Market-cap weighting may expose the strategy to stock- or sector-level concentration risk when a few richly valued companies or sectors power most of the market gains. As of February 2024, the portfolio’s top 10 holdings made up the largest portion of the index (28%) since its 2011 inception. Likewise, its 28% allocation to tech stocks was the highest over the same period. This is not a design fault. The CRSP US Total Market Index simply reflects the market’s composition. In the long run, its broad diversification, low turnover, and low fee outweigh these risks.

Vanguard Total Stock Market ETF VTI: Performance Highlights

This strategy accurately represents the investable US stock market, allowing the fund to leverage its cost advantage and drive sound category-relative performance. These qualities should position the strategy to outperform many of its US large-blend peers over the long run.

The strategy’s performance closely follows the ups and downs of the US stock market, since it is always fully invested. All else equal, this strategy should outperform its peers that hold cash during market rallies. Likewise, the strategy should lag similar peers when the market falls because it lacks a cash buffer.

After declining approximately 20% in 2022 on the heels of interest-rate hikes, increased economic uncertainty, and higher inflation, the CRSP US Total Market Index staged an outstanding rally in 2023. It climbed back 26% as a few names and sectors powered gains. Technology, communication services, and consumer cyclical stocks outperformed the market by a large margin, which this strategy captured through its broad reach and market-cap weighting.

This fund should benefit slightly when small-cap stocks outperform large-cap stocks, as they did in the fourth quarter of 2020. The CRSP US Total Market Index beat the Morningstar US Large-Mid Cap Index, which captures the large-cap opportunity set, by 1.68 percentage points over the fourth quarter of 2020. Likewise, the strategy can become top-heavy during periods of consolidation among top US companies. This exposes the funds to dramatic drawdowns when the US market’s largest names collectively decline.



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