Vanguard Total Stock Market Index (VTSMX) is one of the biggest mutual funds in the world for a few simple but powerful reasons—low expenses and broad diversification. New investment is not permitted in VTSMX, but you can invest in its Admiral Shares (VTSAX).
Here's what you need to know about the benefits of investing in total stock market index funds, and other low-cost total stock market index fund options:
- Total stock market funds contain most stocks that are publicly traded in the U.S.
- The Vanguard Total Stock Market Index provides diversification with low fees, and its low turnover rate helps improve tax efficiency.
- As with the S&P 500, the Vanguard Total Stock Market Index is market-weighted, so larger companies take up a larger proportion of the holdings.
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 U.S. 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. This means that larger companies—those with larger capitalization—will represent a larger portion of the top holdings by percentage than smaller companies.
What Makes VTSMX the Biggest and the Best?
Vanguard Total Stock Market Index (VTSMX) 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 2020). 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.