Vanguard Total Stock Market Index Fund Review: What’s Inside (VTSMX, VTSAX, VTI)

(This post is part of a new series taking a closer look at some popular portfolio holdings.)

The Vanguard Total Stock Market Index Fund is one of the largest funds in the world, and definitely the largest index fund. For individual retail investors, it is available in mutual fund flavors (VTSMX, VTSAX) as well as ETF flavor (VTI). Across all shares classes, there is currently over $230 billion dollars of total assets invested in this fund – that’s nearly a quarter of a trillion dollars! If you own a Vanguard Target Retirement or LifeStrategy fund, you own this fund as well. So let’s try to understand what’s inside.

Despite the name, the Vanguard Total Stock Market Index fund only tries to represent all the stocks in the U.S. equity market, from big to small, from financial companies to shoe store chains. The fund is currently transitioning from tracking the MSCI US Broad Market Index to the CRSP US Total Market Index. These are both market-cap weighted indexes, which means that the amount of each stock held is directly proportional to the total market value of the company. In other words, if all Nike shares together are worth $50 billion while Skechers is worth $1 billion, then the index would hold 50 times more Nike than Skechers.

Market Capitalization Weighting

Above is a chart showing how the CRSP US Total Market Index is broken down. CRSP categorizes companies into Mega-cap, Large-cap, Mid-cap, Small-cap, and Micro-cap by cumulative market capitalization, as opposed to a fixed number or a set number of stocks. For example, “Mega cap” companies are those in the top 70% of cumulative market cap. This works out to roughly the 300 largest companies, or the companies worth more than about $2.6 billion. Note that CRSP defines “Large cap” stocks as the combination of “Mega” and “Mid” cap stocks, which can be a bit confusing.

Currently the total amount of stocks in the CRSP index is around 3,600. The smallest company in the index is worth only $2 million. The largest company is worth over $400 billion, or 200,000 times larger than the smallest company. A very wide range. Right now, VTSMX owns all 3,225 companies inside the MSCI index, so I am assuming it will own nearly all of the companies in the CRSP index. (The CRSP index includes some micro-cap stocks that MSCI does not.)

This also means that the top 700 or so stocks make up 85% of the fund, while the bottom 3,000 or so make up only 15% of the fund. The big corporations are really big. The top 10 holdings alone make up 15% of the fund. Some people may view this as a negative, but it also tends to reflect their relative impact on the economy.

Owning the Haystack

Owning a piece of every single stock that is publicly-traded is a powerful thing. Back in 1997, Apple Inc. had a market cap of around $2 billion. Today, the market cap is over $400 billion. That’s 200 times larger, or a 20,000% return over just 16 years. Instead of trying identify ahead of time that little company that will be the next Apple in 2030, you may already own it. To paraphrase a well-known quote from Vanguard founder Jack Bogle:

Don’t look for the needle in the haystack. Buy the entire haystack.

You may not make a 20,000% return, but you will own the result of whatever innovation comes in the future. It make come from one of the big names like Exxon and General Electric, or it make come from a company you’ve never heard of before. Just sit back and relax. 🙂

Another benefit that results from all this is minimal trading and thus very little turnover. If a company rises (or drops) in value, then with market-cap weighting it should be a larger (or smaller) part of the portfolio and there is no need to buy or sell any shares. Since you own the whole haystack, you don’t even have to worry about a company going from “large-cap” to “mid-cap” or vice-versa. This means the fund is very tax-efficient and distributes very little taxable capital gains. In a taxable account, this improves your after-tax returns and lets compounding do its thing.

Sector Breakdown

Here is the overall breakdown of VTSMX holdings by sector, as 3/31/2013.

Fund Management Expenses

As of 4/12/2013, the annual expense ratio of both the ETF (no minimum) and Admiral share classes ($10,000 minimum) of the Vanguard Total Stock Market Index Fund is just 0.05%. So for every $10,000 invested, Vanguard charges a total of just $5 a year to manage this basket of stocks. There is no way an individual could replicate the underlying holding themselves for such a price. The Investor class shares have an expense ratio of 0.17%. Specifically, these fund expenses are taken out of the fund’s net asset value (NAV) a tiny bit each day (fractions of a penny per share).

Final Thoughts

By representing the entire US stock market in a complete, efficient, and low-cost manner, the Vanguard Total Stock Market Index Fund is the epitome of a “core” portfolio holding. Owning a competing index fund that also tracks a broad US index using market-cap weighting with a similarly low expense ratio will likely give you similar results. However, I give a slight preference to Vanguard due to (1) their “at-cost” client-ownership structure helps to ensure that costs will stay low, and (2) their experience and skill at indexing.

Disclosures: VSTMX/VTSAX/VTI is a cornerstone of my portfolio, and I expect it to stay that way for the foreseeable future.