Is Vanguard Total Stock Market ETF a Millionaire Maker?

There’s no right way to invest, with various approaches (like value, growth, and growth plus income) all offering the potential for investors to build a million-dollar nest egg. The bigger question is whether the investment approach you choose is one you can stick with long enough to reach seven-figure status.

That’s where a deep dive into Vanguard Total Stock Market ETF (VTI -0.52%) comes into greater focus.

What is Vanguard Total Stock Market ETF good for?

As Vanguard Total Stock Market ETF’s name implies, the basic goal of the fund is to provide the broadest possible exposure to the U.S. stock market. It is a one-stop option for the stock portion of a portfolio for investors who don’t want to go through the effort of trying to pick individual winners and losers and for those who don’t want to hew to a specific investment style. It works particularly well for asset allocation, pairing nicely with Vanguard Total Bond Market ETF (BND -0.32%), which is the same basic idea, but for U.S. bonds.

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To put it simply, with these two funds you could create a portfolio that only needs to be looked at once a year. And, even there, the only thing you need to think about is returning the portfolio to its target allocation. For example, the old Wall Street guideline of a 60% stock/40% bond portfolio would have you split your portfolio 60/40 between Vanguard Total Stock Market and Vanguard Total Bond Market. After a year of owning them, buy and sell as needed to return the portfolio back to 60/40. Pretty simple.

You could add in other funds to bias the asset allocation in some way, but you don’t need to. This portfolio would be enough for most investors to build a million-dollar nest egg. That caveat is that it will be a slow process. Going 60/40 with incredibly broad-based ETFs is not a way to get rich quickly. It is a way to get rich slowly, but history has shown that such an approach will likely work — if you stick with it for long enough.

The biggest benefit of Vanguard Total Stock Market ETF is probably that it allows you to focus most of your effort on saving money. That is, in the end, where you will likely have the biggest impact on your financial fortunes anyway. That actual act of investing is something that you should focus intently on if — and only if — you actually enjoy doing it. Otherwise, outsourcing to an ETF like this one is probably a better choice.

Some details about Vanguard Total Stock Market ETF

Vanguard Total Stock Market ETF holds around 3,750 stocks. That’s a huge figure that would be impossible for an individual investor to copy on their own. The fund is market cap-weighted, however, so the largest companies have the most assets invested in them. The two biggest holdings are Apple and Microsoft, at around 6% of assets each. But the weightings go down fairly quickly from there, with the No. 10 holding, Eli Lilly, accounting for roughly 1% of assets. In other words, the largest stocks are important, a situation that market cap weighting is designed to create, but with so many other holdings, the impact isn’t as massive as it might be in a fund with a shorter list of holdings.

The ETF has around $1.5 trillion in assets, which is also a huge figure. There are two notable takeaways here. First, Vanguard isn’t likely to shut down a fund this large given the clear demand for the product. Second, more assets means lower costs, since expenses can be spread over more shares. Vanguard Total Stock Market ETF’s expense ratio is a tiny 0.03%. You would be hard-pressed to find an ETF that’s cheaper to own than this one.

As for performance, well, it basically tracks the market. And that is exactly what you would expect the fund to do given it effectively owns the market. The one thing that’s largely missing from Vanguard Total Stock Market ETF is foreign exposure, which sits at just 0.2% of assets. That, however, is by design, because the ETF is specifically meant to track the U.S. market. One last detail is the dividend yield, which is fairly modest at 1.4%. However, that’s pretty much what you would expect from an ETF as broadly diversified as this one.

Getting rich slowly

The big takeaway here is that Vanguard Total Stock Market ETF is a way to build wealth over time. It can definitely help you reach millionaire status, but it will be a process getting there, not an overnight success story. The main benefit of owning it is that it simplifies your investment life and allows you to focus on saving money and living your real life (you know, like spending time with friends and family). If you don’t enjoy poring over 10-Qs, 10-Ks, and quarterly conference calls, this could be just the ETF you’ve been looking for.