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Investing in the stock market can be overwhelming for many investors.
You have mutual funds, exchange traded funds, and individual stocks.
And that is just the more popular investment options.
The good news is there are some great mutual funds for individual investors that make investing a lot less complicated.
The best example of this is the Vanguard Total Stock Market Index Fund (VTSAX).
In fact, it should be a core equity holding in your investment portfolio.
In this post, I answer the question of ‘is VTSAX a good investment’ and explain why you should be investing in this index fund.
Table of Contents
Is VTSAX A Good Investment?
What Is VTSAX?
VTSAX is the trading symbol for the Total Stock Market Index Fund offered by Vanguard.
Vanguard offers many high quality mutual funds to investors.
What sets them apart from other companies is they prioritize index funds.
Investing in index funds is a passive investment strategy that has you invest in mutual funds that track the stock market.
- Read now: Learn the pros and cons of index funds
In this case, the Total Market Index Fund tracks the entire stock market.
Another investment fund Vanguard offers, VFIAX or the S&P 500 Fund, only tracks the S&P 500 Index.
What Type Of Mutual Fund Is VTSAX?
The Total Stock Market Index Fund is a passively managed fund.
This means the goal of the fund is to earn investment returns in line with the overall stock market.
So if the market earns 12% this year, VTSAX is going to earn something close to this.
Contrast this with actively managed mutual funds.
With these investments, the funds are trying to outperform the stock market.
So if the market earns 12%, the goal of actively managed funds is to earn more.
While earning a higher return is great, the reality is very few of these funds actually beat the market on a consistent basis.
The result is many times you will earn less than the market.
What compounds this issue is the expense ratio you pay to invest in a mutual fund.
The Cost Of Investing
All mutual funds charge a management fee to invest.
This is also called the expense ratio.
It covers the cost of having a professional manage the fund.
Actively managed mutual funds have a higher expense ratio because they are actively researching stocks, buying and selling.
Index funds on the other hand, have a lower expense ratio.
While they too have fund managers, they are not researching, buying and selling since they are investing in the same investible stocks that the index is tracking.
And these stocks rarely change.
What many investors don’t understand is how the expense ratio impacts their investment returns.
The fee comes out from the return of the mutual fund.
Let’s say you are paying a 1% annual fee and the fund earns 10%.
The fee you pay comes from the 10%, so you are earning closer to 9%.
Over time, this fee eats into your investment.
Because of this, it is critical you put your money into low expense ratio investments, like Vanguard Funds.
I say this because Vanguard mutual funds typically are the lowest cost funds out there.
There are others, like Fidelity and Charles Schwab, which I get into later.
But the bottom line is, you can’t go wrong with Vanguard if you are interest in index fund investing.
Vanguard Total Stock Market Index Fund Holdings
As of this writing, the Vanguard Total Stock Market Index fund holds 4,070 stocks with a total market value of $129.6 billion.
The total net assets are $1.3 trillion, making it one of the largest Vanguard index funds out there.
Here are the top 10 holdings as of this writing:
- Berkshire Hathaway
- Mata Platforms
- United Heath
- Johnson & Johnson
It is important to understand that this index fund market capitalization weighted.
What this means is the stock holdings are in proportion to each company’s share of the stock market.
For example, if you have 10 crayons and 5 are blue, 3 are red, 1 is yellow, and 1 is green, you have 50% blue, 30% red, 10% yellow and 10% green.
The potential problem here is say these colors are stocks and the green stock suddenly explodes in value.
The overall return of the box of crayons won’t move much because only 10% of the holdings are green.
On the other hand, if the blue stock dramatically falls in value, it will pull the entire fund value down since it makes up a large percentage of the fund.
I understand this is more of an advanced concept but it is important to know.
For most investors, this isn’t a big enough factor to stop you from investing in the fund.
The reason I say this is because the top 10 holdings combined make up 24% of the fund, so one large movement by a stock won’t have a dramatic impact.
Advantages And Drawbacks
All investments have advantages and drawbacks to them.
Here are the pros and cons of investing in VTSAX.
Low expense ratio. With low fees, more of your money stays invested and can compound into more money over time.
Diversified portfolio. Invests in all market caps, making it the only equity investment you need.
Tracks the market. Earn what the market earns, so investing is more hands-off.
Low additional investments. Invest as little as $25 on an ongoing basis once you meet the minimum investment.
High minimum investment. You need at least $3,000 to get started with the Total Stock Market Index Fund. This makes it off limits to many small investors.
No international exposure. You are only investing in US stocks with this index fund.
Market capitalization weighted. the index fund bases its holding by market cap, which skews the holdings to be more large cap stocks and fewer small cap stocks.
Alternatives To VTSAX
With so many investment options, there are alternatives to Vanguard’s VTSAX fund.
Here are some of the best options.
Vanguard Total Stock Market Index ETF (VTI)
The Total Stock Market ETF is the ETF equivalent of the index fund.
The biggest difference is it has an even lower expense ratio than the mutual fund version.
You also avoid the investment minimum as you can buy one share if you like.
Schwab Total Stock Market Index Fund (SWTSX)
This mutual fund is very similar to the total market index fund Vanguard offers.
There are a few differences with this fund.
- Read now: See why I love investing with Schwab
The first is it holds different percentages of the same individual stocks.
It also has a lower expense ratio of 0.03%.
Finally, you only need $1 to start investing, making it great for investors without a lot of cash to invest.
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Fidelity ZERO Total Market Index Fund (FZROX)
This fund differs in that is has no management fee.
That’s right, it doesn’t cost you anything to own this fund, which is fantastic.
The downside is you can only invest as a Fidelity customer.
Frequently Asked Questions
I get asked a lot of questions about the Vanguard stock market index fund.
Here are the most common ones.
Is VTSAX good for beginners?
This is a complicated answer.
It is great for new investors because it offers a diversified exposure to the stock market.
If you invest in this fund, you own large cap growth, large cap value, small cap growth, small cap value, and many other asset classes.
This means you don’t have to buy a separate fund to invest in large cap stocks or small cap stocks.
You have the entire market in one fund.
But, you need a lot of money to invest.
So if you have the money to meet the minimum initial investment, then this is something to consider.
If you don’t have this amount of money, then invest in the Schwab stock market index fund mentioned above.
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What is the average return of VTSAX?
The 10 year return on the admiral fund share class is 14.22%.
Since the index fund was founded in 2000, it has returned 8.09%
For comparison, you can assume over the long term the stock market will earn an average of 8% annually.
This shows the index fund right in line with this number.
But what does this look like in dollar terms?
If you invested $10,000 ten years ago, and left it alone, you would have close to $38,000 today.
That is almost quadrupling your money and you are going to have a hard time finding that great of a risk adjusted return on anything else.
In other words, there are investments out there where you can earn a higher return, but when you use a risk adjusted basis to accurately compare the two, you will see you take on much less risk with VTSAX than the other investments.
Does VTSAX pay a dividend?
The total stock market index fund does pay a quarterly dividend, every March, June, September, and December.
It also will pay out capital gains in December.
The 30 day SEC dividend yield on the index fund is 1.27%.
- Read now: Here is how to start dividend investing
Should I choose the mutual fund or ETF version?
For most investors, the mutual fund is perfectly fine.
However, if you are looking for a tax efficient investment, you are better served with the ETF.
This is because ETFs naturally have better tax efficiency since they don’t generate a lot of capital gains.
Also, since you don’t need as much money to invest in the ETF, it can be a better choice for people without a lot of money to invest.
With that said, this point does not matter if you invest in retirement accounts since your capital gains will not be taxed.
It only applies to a taxable account.
Do I need other investments to have a diverse portfolio?
The total stock market index fund only invests in US publicly traded companies, so some investors argue that you need an international fund as well.
However, with business being global, many of the companies in the VTSAX have international exposure.
For example, Coca-Cola sells soft drinks all over the world.
And McDonald’s serves its hamburgers world wide.
Even with this, some investors still suggest you need a dedicated international fund.
At the end of the day, it is your decision if you need a separate fund or not.
Personally, I invest 5-10% of my money in an international index fund.
- Read now: See the importance of a diversified portfolio
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There is the answer to the question of is VTSAX a good investment.
Overall, investing in index funds is a smart way to keep investing simple.
And since this index fund invests in the market as a whole, it is a great fund for all investors to have as a core part of their portfolio.