Introduction
The Vanguard Total Stock Market Index Fund (VTSMX) is one of the largest mutual funds in the world for several simple yet powerful reasons, including low costs and broad diversification. New investment in VTSMX is no longer allowed, but you can invest in its Admiral Shares (VTSAX).
What is a Total Stock Market Fund?
A total stock market fund is a mutual fund that invests in a range of stocks that closely reflect the holdings and performance of a specific index, such as the Wilshire 5000 or the Russell 3000. The portfolios in a total stock market fund typically include most of the U.S. stocks traded on stock exchanges, which is why the term “total market” is usually included in the fund’s name.
What Makes VTSAX the Largest and Best?
VTSMX closed to new investors in 2018. However, you can invest in the Admiral Shares version of the fund (VTSAX) with the same minimum investment requirement of $3,000 and lower expense ratios.
The Admiral Shares of the Vanguard Total Stock Market Index Fund (VTSAX) share the same characteristics that make the best index funds: diversification, low costs, low turnover ratio, tax efficiency, and more.
Advantages of Investing in VTSAX
The advantages of investing in VTSAX include:
1. Diversified Portfolio: VTSAX is designed to provide investors with the opportunity to invest in the entire U.S. stock market, including small, mid, and large-cap companies in both growth and value. The fund tracks the CRSP US Total Market Index, which represents nearly 100% of the investable U.S. stock market. The portfolio is weighted by market capitalization, meaning that larger companies make up a larger portion of the portfolio than smaller companies.
2. Low Costs: The passive nature of VTSAX means there is no need for research and trading costs associated with active management. The expense ratio for VTSAX is 0.04%, which is extremely low by industry standards and amounts to just $4 on every $10,000 invested.
3. Low Turnover Ratio: The primary reason for VTSAX’s low costs is its low turnover ratio of 8% (as of the end of the fiscal year in December 2020). The turnover ratio is the percentage of assets in the fund that were replaced with different investments during the previous year. Turnover ratios in actively managed equity funds often exceed 50%, leading to higher fees and worse long-term performance.
4. Tax Efficiency: A direct result of the low turnover ratio is the reduction in taxes that investors incur. When mutual funds sell assets at a higher price than the purchase price, they generate capital gains tax, which is passed on to investors in the form of “capital gains distributions.” If you hold an equity fund in a taxable account, you will pay taxes on these distributions. Therefore, if you want to minimize taxes, you would prefer a tax-efficient fund like VTSAX.
Although VTSAX is a diversified investment in itself, many investors prefer to purchase other diversified investments to create a complete portfolio.
It should be noted that The Balance does not provide tax, investment, or financial services advice. This information is provided without regard to the investment objectives, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not an indicator of future results. Investing involves risks, including the risk of loss of principal.
Sources:
- Vanguard. “Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX).”
- Wilshire. “Indexes.”
- Vanguard. “Annual Report | December 31, 2020: Vanguard Total Stock Market Index Fund,” Page 29.
- Vanguard.
- “Vanguard Total Stock Market Index Fund Admiral Shares: Portfolio.”
- Internal Revenue Service. “Mutual Funds (Costs, Distributions, etc.).”
Source: https://www.thebalancemoney.com/vanguard-total-stock-market-2466418
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