Why Vanguard Total Stock Market Index is the Biggest Fund in the World
Advantage of VTSMX and Index Funds Like It
Vanguard Total Stock Market Index (VTSMX) is the biggest mutual fund in the world for a few simple but powerful reasons. Before we get to the benefits of investing in VTSMX, we'll cover the advantages of index funds and other total stock funds.
What is a Total Stock Market Fund?
A total stock market index fund is a mutual fund that invests in a basket of stocks that will closely mirror the stock holdings and performance of a particular benchmark, such as The Wilshire 5000 or The Russell 3000. The holdings in a total stock index fund include most of US stocks traded on stock exchanges, which is why the "total market" name is usually included in the fund name.
Like S&P 500 Index Funds, the Wilshire 5000 is market-cap weighted, which means that larger companies (those with larger capitalization) will represent a larger portion (be among the top holdings) by percentage than the smaller companies.
What Makes VTSMX the Biggest and the Best
The reason why Vanguard Total Stock Market Index (VTSMX) is that it shares the same qualities as the best index funds: Diversification, low expenses, low turnover, tax-efficiency, and more.
The benefits of investing in VTSMX include:
- Diverse holdings: VTSMX is designed to provide investors with exposure to the entire U.S. equity market, including small-, mid- and large-cap companies across both growth and value. The fund tracks the CRSP US Total Market Index, representing nearly 100% of the investable U.S. equity market. The fund is cap-weighted, which means the largest stocks by capitalization represent more of the portfolio than smaller capitalizations.
- Low expenses: The passive nature of VTSMX means there is no need for higher relative research and trading costs necessary for active management. The expense ratio for VTSMX is 0.17%, which is extremely low by industry standards and adds up to just $17 on every $10,000 invested.
- Low turnover: A primary reason for the Total Stock Market fund’s low expenses is the low turnover of 0.03%. turnover is the percentage of the fund’s holdings that were replaced with a different investment (or “turned over”) during the previous year. Actively-managed stock funds often have turnover ratios that exceed 50%, which can result not only in higher fees but worse performance in the long-term.
- Tax-efficiency: A direct result of low turnover is a reduction in taxes passed through to the investor. When mutual funds sell holdings at a price higher than than the purchase price, it produces a capital gains tax, which is then passed along to investors in the form of “capital gains distributions.” If you hold a stock fund in a taxable account, you’ll pay taxes on these distributions. Therefore, assuming you like to minimize taxes, you’ll want a tax-efficient fund like VTSMX.
Although VTSMX is a diverse investment in itself, many investors are wise to buy other diverse holdings for a complete portfolio.
See Also: Total Stock Market Index vs S&P 500
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.