Vanguard: Total Stock Market Index or ETF
There are many funds: Index or ETF that invest in Mega-cap: Market cap of $200 billion and greater. Big-cap: $10 billion and greater. Mid-cap: $2 billion to $10 billion. Small-cap: $300 million to $2 billion.. While many funds may not be representative of the entire stock market, they would represent a significant percentage. Most total stock market funds are capitalization weighted, so proportionately invest more in the larger market cap companies.
The problem with investing in broader less popular indices is that they may be less liquid and their constituents may be less liquid, resulting in higher transaction costs that will reduce gains.
An important factor also when choosing funds is the expense ratio. Higher expense ratios can make a significant difference over years of holding the positions.
For all the reasons, Vanguard designed to provide exposure to the entire U.S. equity market. Vanguard Total Stock Market Index is available to investors in a different name (Investor, Admiral, ETF, Institutional) and everywhere (401k, IRA,529, Custodial, Brokerage). Out of which Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and equivalent ETF are close to those of SPY and VOO, as these funds track similar indexes, meaning it’s been a darling for long-term investors. VTSAX is managed by Vanguard since 1992 and the equivalent ETF called Vanguard Total Stock Market which tracks CRSP US Total Market Index and managed by Vanguard passively. It is not quite different in capitalization-weighted when compared to other total stock market funds like Fidelity® Total Market Index Fund. Because ~22% of weightage was given to 10 Large CAP companies out of 3791 stocks with a median market cap of $124 billion and total fund net asset of 1.2 trillion as of 06/18/2021 which is huge and distinguishes Vanguard Total Stock Market from other Hedge Total Stock Market Fund.
MSFT Microsoft Corp 4.39
AAPL Apple Inc 4.39
AMZN Amazon.com Inc 3.21
FB Facebook Inc A 1.84
GOOGL Alphabet Inc A 1.65
GOOG Alphabet Inc Class C 1.57
BRK.B Berkshire Hathaway Inc Class B 1.2
JPM JPMorgan Chase & Co 1.17
TSLA Tesla Inc 1.12
JNJ Johnson & Johnson 1.04
When we look at the expense ratio of these funds i.e. VTSAX and VTI which are 0.04% and 0.03% respectively, meaning if you invested $10,000 on each fund, then Vanguard will charge you $4 and $3 for VTSAX and VTI respectively with 8% turnover rate i.e. $800 (as of fiscal year-end December). Here there is room for argument with respect to the turnover rate, there are some funds Columbia Global Technology Growth Fund Institutional Class (CMTFX) (This mutual fund is closed to new investors) yields higher return but a problem is CMTFX’s fees are 0.97% of assets, much higher than VTI’s 0.03% or VTSAX’s 0.04%, fretting over fees, in this case, was clearly pennywise and pound foolish. Most Vanguard retirement funds and the Vanguard STAR Fund have investment minimums of $1,000, and VTSAX funds carry minimums of $3,000 and should be invested through Vanguard brokerage account for zero transaction fee. There is no minimum investment for VTI (ETF) and it can be traded like regular stocks in any brokerage account without a transaction fee.
How the vanguard group manages this fund, is something interesting to look at it. There are some inclusion and exclusion criteria for CRSP, so it doesn't hold all the stocks listed in NYSE or NASDAQ. The group uses proprietary software to implement trading decisions that accommodate cash flow and maintain a close correlation with index characteristics. Because the index is CAP weighted if the stock market goes up to 10%, so does your value of the investment. For example, the value of Apple makes up 2% of the value of the stock market as a whole, then 2% of the value of the stock index, along with 2% of the money in the index fund following that index, will come from the performance of Apple. Vanguard TSM has been invested in Tesla since 2010. If you’ve owned the fund since then, you’ve benefitted from the meteoric rise in the value of those initial shares. In two decades, this fund has survived the dot-com crash of the early 2000s and the Great recession in 2008. within 15 years, you will see two negative returns but VTSAX gave a positive return of 0.4% to 33.51%.
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Now you learned what is pros and cons of Vanguard Total Stock Market funds. In the coming section, you are going to see How I learned about this fund and why I am investing in these funds.
I am a follower of Our Rich Journey youtube channel (https://www.youtube.com/OurRichJourney) and happened to watch the above video. This is where it started. Why I have to look for the needle in the haystack when I can just buy the whole haystack? For real though, this fund is just a low-cost way to buy a piece of the entire US stock market. As an investor, I am poor at handpicking stocks and I cannot time the market. So I chose a simple and uncomplicated approach to diversify my portfolio through Vanguard. My portfolio is a mix of Vanguard funds and individual stocks. (Please check the screenshot below)
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