Personal Finance

Vanguard Total Stock Market Index Fund -- Investing in Stocks the Easy Way

The Vanguard Total Stock Market Index Fund (NASDAQMUTFUND: VTSMX) is designed to provide investors with exposure to the entire U.S. stock market. The index fund holds a total of 3,682 different stocks, with higher weights given to larger companies.

Here's what you should know about this broad index fund and why it could be a great addition to your long-term portfolio.

About the Vanguard Total Stock Market Index Fund

As the name implies, this fund is designed to give investors exposure to the entire U.S. stock market. The fund has $417.9 billion in total assets, and follows an investment strategy designed to track the CRSP U.S. Total Market Index, which covers virtually 100% of stocks listed on the NYSE and NASDAQ.

Although the fund is diversified among 3,682 U.S. stocks, it's important to point out that your investment isn't divided equally. Rather, it is weighted to give more exposure to larger companies. As of March 31, 2016, the largest 10 holdings made up 15.4% of the fund's total assets, so a big move by any of these companies would have a significant effect on the fund's value.

Company % of fund's assets
Apple 2.6%
Alphabet (Google) 2%
Microsoft 1.9%
ExxonMobil 1.6%
General Electric 1.4%
Johnson & Johnson 1.4%
Berkshire Hathaway 1.2%
Facebook 1.1%
AT&T 1.1% 1%

Data source: Vanguard Group.

Why you should consider the fund

The most compelling reason is that the Vanguard Total Stock Market Index Fund gives you exposure to the entire U.S. stock market in a single investment. Unlike S&P 500 or other popular index funds, this gives you exposure to large-cap stocks as well as small- and mid-caps.

You may have heard that stocks have historically outperformed all other asset classes over long periods of time, and this is true. The main point of investing in a fund like this is to capture that excellent long-term performance without having to choose individual stocks or buy index funds that focus on a single type of stock.

Since its inception in 1992, the fund has averaged an annual return of 9.15%; however, this has ranged from a one-year gain of 33.4% in 2013 to a one-year loss of 37% in 2008. So, while I wouldn't suggest this fund for short-term investors, those who have held the Vanguard Total Stock Market Index Fund for the long haul have been handsomely rewarded. In fact, a $10,000 investment in the fund in 1992 (24 years ago) would have ballooned to nearly $82,000 today.

In addition, the fund's expense ratio of 0.16% is extremely low. According to data from Morningstar, this is 84% lower than the average fund with similar holdings, which can make a big difference over the long run. In fact, a $10,000 investment in this fund would result in $376 in fees over a 10-year period, based on the historical average returns. In contrast, the average fund in the category would cost $1,909 more . So you'll be able to keep more of your profits than with other total-market funds.

The Vanguard Total Stock Market Index Fund also has no purchase fees or redemption fees, and no annual service fees if your account has more than $10,000 or you choose electronic delivery of your statements.

You won't get rich quick, but you'll do well over time

Obviously, if you're looking to beat the market, the Vanguard Total Stock Market Index Fund isn't for you. By definition, you'll simply match the market's performance and nothing more. However, if you want to put your stock portfolio on autopilot and take advantage of the compounding power of the stock market -- which has outperformed every other asset class over long time periods -- you might want to consider this fund for a major part of your investment strategy.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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