This fund owns just about all investable U.S. stocks at a low price.

by Adam McCullough
Vanguard Total Stock Market ETF

Vanguard Total Stock Market Index ETF VTI is a compelling option for exposure to U.S. stocks of all sizes. This fund secures an edge over category peers by efficiently tracking a broadly diversified and representative benchmark at a low cost. It earns a Morningstar Analyst Rating of Gold.

This fund tracks the CRSP U.S. Total Market Index, a market-cap-weighted index that holds nearly every investable U.S. stock. Market-cap weighting pulls the portfolio toward the largest U.S. stocks and accurately reflects the composition of the market.

There are a few benefits of weighting by market capitalization. This approach incorporates the cumulative knowledge aggregated in stock prices to size its positions. It keeps costs low because it doesn’t require fundamental research analysts or skilled stock-pickers, who can be expensive to hire. While the market doesn’t always get things right, it has done a good job valuing stocks over the long haul.

Low turnover is another key advantage of the fund’s broad market-cap-weighted approach, as it mitigates transaction costs and the likelihood of taxable capital gains distributions. Compared with funds that track specific market size segments, this fund benefits more from weighting by market cap because it doesn’t have to sell or buy names as they cross arbitrary market-cap size segments. The fund’s average turnover over the past decade measured a small fraction of the average turnover of its large-blend Morningstar Category peers. Tax efficiency adds to the fund’s appeal. It has not distributed any capital gains since its inception in 2001.

The fund outpaced the category by 1.6 percentage points annually during the past decade through February 2019 with similar risk. Much of this outperformance can be attributed to the fund's cost advantage. Because this index fund is always fully invested, it suffered a larger drawdown than the category average during the financial crisis. But its smaller cash drag pays off during bull markets. The fund’s performance during the market recovery more than made up for its larger drawdown.

Portfolio Construction

This fund represents the entire investable U.S. equity market and effectively diversifies risk. It earns a Positive Process Pillar rating. The fund tracks the CRSP U.S. Total Market Index, which holds almost every liquid U.S. stock. It includes all stocks with a primary listing on a major U.S. stock exchange with a market cap of at least $10 million. The fund employs full replication for the largest 1,200 or so stocks in its portfolio--owning each in their corresponding index weightings--and then samples from the remaining smaller-cap stocks. However, this fund’s large asset base allows it to replicate the index more completely than most other total market funds. The resulting portfolio consists of approximately 3,600 holdings, the same as the index. While the fund holds nearly all common equities and REITs, it excludes business-development companies, master limited partnerships, ADRs, and royalty trusts. The fund uses securities-lending revenue to reduce costs. This fund has changed its benchmark index twice since its May 2001 inception. Up until April of 2005, it tracked the Dow Jones U.S. Total Stock Market Index (formerly the Dow Jones Wilshire 5000 Index). From April 2005 until June 2013, it followed the MSCI U.S. Broad Market Index. These changes were largely immaterial. Vanguard’s desire to reduce index licensing fees drove the most recent index change. This fund minimizes its cash drag by using derivatives to equitize cash.


Vanguard charges a low fee of 0.04% for this fund, which offers a durable edge and supports its Positive Price Pillar rating. This is a fraction of the median category fee of 0.65%. During the trailing year through February 2019, this fund outpaced its benchmark by 1 basis point per year. This implies the fund has been able to more than offset the performance drag created by its fee through a combination of savvy portfolio management techniques and securities lending.

S&P 500 index data: S&P 500 Copyright @ 2019

All data from Morningstar except U.S. intraday real-time exchange quotes, which are provided by BATS when available. End-of-day quotes for Nasdaq, NYSE, and Amex securities will appear 15 minutes after close. Graph times are Eastern Standard. @ Copyright 2019 Morningstar, Inc.