Investing in the stock market is a great way to build long-term wealth. While short-term trading is tempting, the real power of investing lies in a disciplined, patient approach. By focusing on a diversified portfolio of stocks with varying attributes, investors can smooth out volatility and ensure that no single company or sector dominates their returns.
However, for many investors, especially those just starting, the shear volume of choices can feel overwhelming. With thousands of publicly traded companies and countless strategies to consider, it’s easy to get lost in the noise.
That’s where broad-based index funds like the Vanguard Total Stock Market ETF(NYSEMKT: VTI) can help. This ETF offers exposure to the entire U.S. equity market through a single, low-cost investment. That’s why, if I could only invest in a single stock, this would be it.
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The Vanguard Total Stock Market ETF is an exchange-traded fund (ETF). ETFs are investment vehicles that trade on stock exchanges like regular stocks. Unlike mutual funds, ETFs can be bought and sold throughout the trading day, offering flexibility and liquidity.
ETF investing comes with several key benefits. For one, they are typically low-cost, with expense ratios much lower than actively managed funds. ETFs also offer diversification and are tax-efficient due to their unique structure, which minimizes capital gains distributions. Finally, they are transparent, with holdings published daily, and are easily accessible through most brokerage accounts.
The Vanguard Total Stock Market ETF appeals to me because it provides investors with broad exposure to the entire U.S. equity market. Unlike funds that track only a segment of the market, this particular ETF includes large-, mid-, and small-cap companies across all sectors and holds over 3,500 stocks.
The S&P 500 index tracks the 500 largest U.S. companies, primarily large-cap stocks like Apple, Microsoft, and JPMorgan Chase. While the S&P 500 offers a strong representation of the U.S. economy’s core, it skips over smaller stocks.
The Nasdaq-100, on the other hand, is very concentrated. It includes 100 of the largest non-financial companies listed on the Nasdaq exchange, with a heavy tilt toward technology and growth stocks. While this can lead to outsized gains during bull markets, it also introduces higher volatility and sector concentration risk.
Another benefit of this ETF is its low fees. Low fees are essential when investing in ETFs, and the expense ratio is a key metric to watch.
The expense ratio represents the annual cost of owning a fund, expressed as a percentage of your investment. For example, this ETF has a 0.03% expense ratio, meaning you will pay $3 in fees (covering fund management and operational costs) annually for every $10,000 invested.
Expense ratios matter because over time, high fees can erode your returns, especially in long-term investing, where compounding plays a significant role. While passive funds like the Vanguard Total Stock Market ETF have low expense ratios, some more actively managed funds could charge as much as 0.5% or even 1%, eating into your long-term returns.
The Vanguard Total Stock Market ETF offers investors a highly diversified portfolio with minimal effort required. This makes it ideal for investors looking for broad exposure to the market. Also, since it is invested in stocks only, this ETF is more suited for investors with a long-term horizon of a decade or more.
If you have a long time horizon and are looking for a hands-off approach to investing, the Vanguard Total Stock Market ETF might just be what you are looking for.
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Courtney Carlsen has positions in Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.
