Why Vanguard Total Stock Market Index is the Biggest Fund in the World
VTSMX: Advantages of Total Stock Market Funds
Vanguard Total Stock Market Index (VTSMX) is one of the biggest mutual fund in the world for a few simple but powerful reasons—low expenses and broad diversification. But there are additional, more specific benefits of investing in VTSMX and low-cost index funds like it.
Here's what you need to know about VTSMX and other total stock market index 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 advantages 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 the research and trading costs associated with active management. The expense ratio for VTSMX is 0.14%, which is extremely low by industry standards and adds up to just $14 on every $10,000 invested.
- Low turnover: A primary reason for the Total Stock Market fund’s low expenses is the low turnover of 8% (as of fiscal year end December 2021). 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 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.
Note: VTSMX closed to new investors in August 2018. However, you can invest in the lower cost Admiral Shares version of the fund (VTSAX) for the same minimum investment of $3,000 and a lower expense ratio of just 0.04%.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.