There are nearly10,000 mutual fundsavailable to investors.
The biggest one of them all isVanguard Total Stock Market Index Fund (VTSAX).
Withover $750 billion dollars in assets under management, VTSAX is the centerpiece investment in the portfolios of millions of investors.
In this article, we review VTSAX and see whether it is a good fit for you.
Index funds are different from your typical mutual funds. The typical mutual fund tries to pick stocks and maximize investment returns. However, because there aremillions of investors trying to do the exact same thing, publicly-traded stocks are fairly priced and the vast majority of actively-managed mutual funds fail to beat the total stock market in the long run.
Index funds, rather than trying to beat the market, merely try to match the marketby replicating a benchmark stock portfolio, or index.
Index funds provide several clear benefits to investors:
With index funds such as VTSAX, you are able to get investment exposure to over 3,000 stocks.
This means that your portfolio returns arent significantly affected by the poor performance of a single company.
By spreading your money across thousands of companies, your investment returns are significantly less volatile than if you only held 1 stock or even 5 stocks.
It would be incredibly cumbersome to try to buy and manage a portfolio of 3,500 stocks.
But Vanguard and others have made it incredibly easy to get the same investment returns as holding a portfolio thousands of stocks.
Through their index funds, Vanguard offers investments that give investors the exposure of holding thousands of stocks in a single investment product.
Getting the benefits of diversification across thousands of stocks doesnt get any easier than buying a single index fund.
Index funds are the lowest-cost mutual funds available to investors. Index funds often charge 10% of the fees of the typical actively-managed fund.
This is because the primary costs of running an index fund are the logistical costs of holding thousands of stocks in the same balance as its benchmark index.
They do not have to pay expensive staff to research stocks. Fund managers dont have to fly to meet with company executives. Star fund managers dont need to be compensated millions of dollars in a typically futile attempt to achieve above-market returns.
This means you get to pay less for your investments, whichleads to higher returns for you.
Most index investors choosing a U.S. stock index fund typically choose one that replicates either the S&P 500 or a total stock market index. TheS&P 500 and total stock market index has a very high correlation(greater than 99%); this is because around 75% of the total stock market index contains large-cap stocks such as those in the S&P 500.
VFIAXis the Vanguard index fund that tracks the S&P 500: it hasmore than $440 billion under managementand has an expense ratio of 0.04%.
While both options are excellent index funds, VTSAX, with its exposure to mid-cap and small-cap stocks, is slightly more diversified than the large-cap only VTIAX.
There are two ways to purchase a total stock market index fund at Vanguard.
Vanguard offers two share classes for their total stock market index funds: Admiral Shares and an exchange-traded fund (ETF).
VTSAXis Vanguards Admiral share class for the total stock market. The Admiral share class has the lowest cost (0.04% for VTSAX), but has a minimum investment of $3,000.
If you do not have $3,000 to invest in the Admiral Shares (VTSAX), then you should invest in the ETF.Vanguards Total Stock Market ETF is VTI. It hasover $101 billion in assetsand has the same low expense ratio of 0.04% as VTSAX. There is no investment minimum with VTI, so it is an excellent option for Vanguard investors who do not have $3,000 to invest in VTSAX.
VTSAX tracks the CRSP US Total Market Index, which aims to replicate the entire U.S. total stock market, including large-cap, mid-cap, small-cap, and micro-cap stocks.
This isnt an index whose performance gets talked about on the nightly news like the Dow Jones Industrial Average or the S&P 500. But because it holds more stocks, the CRSP US Total Market Index better represents how the entire U.S. stock market is doing compared to the Dow Jones Industrial Average or the S&P 500.
Of note, competing total stock market index funds and ETFs usually replicate similar, but slightly different total stock market indices.
VTSAXcurrently holds3,680 stocks. This demonstrates one of the primary benefits of total stock market index funds. Instead of having to buy thousands of individual stocks, you get the benefits of diversifying across over 3,500 stocks with only a single fund.
VTSAX is the best option for total stock market index investing at Vanguard, but there may be fees associated with buying Vanguard mutual funds such as VTSAX at other brokerages such as Fidelity or Schwab. Fortunately, there are excellent alternatives to VTSAX at these brokerages.
Fidelity offers a total stock market index fund,FSKAX, that has very similar returns to VTSAX. Its expense ratio (0.015%) is slightly lower than VTSAXs expense ratio.
Fidelity made big news when they offered thefirst mutual funds with a 0.00% expense ratio. FZROX replicates a proprietary total stock market index that is similar to many other total stock market indices.
One major downside of FZROX is that it is available only to Fidelity investors. FZROX is most appropriate for Fidelity customers looking for a total stock market index investors in their retirement accounts.
Schwab also offers a low-cost total stock market index fund,Schwab Total Stock Market Index Fund (SWTSX). It has a low expense ratio (0.03%) that is very competitive to Vanguards VTSAX, and is most appropriate for Schwab investors looking for a total stock market index option for their retirement accounts.
For those who prefer investing in exchange-traded funds (ETFs), an excellent non-Vanguard total stock market ETF isiShares Core S&P Total U.S. Stock Market ETF (ITOT). It has an expense ratio of just 0.03%. Since ETFs areslightly more tax-efficient than mutual fundsat companies other than Vanguard, ITOT is the ETF I use for U.S. total stock market exposure in my taxable account.
Vanguard Total Stock Market Index Fund (VTSAX) is the largest mutual fund in the world, and for good reason. It is one of the most well-run index funds in the world and has provided millions of investors with simple, low-cost diversification to the entire U.S. stock market. Vanguard investors should use it as the centerpiece of their portfolios. There are excellent alternatives for investors at other brokerages such as Fidelity and Schwab, but I fully expect VTSAX to remain the largest mutual fund in the world for years to come.
What do you think? Do you have any questions about VTSAX? Do you invest in VTSAX?
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It is hard to argue against VTSAX. JL Collins (Simple Path to Wealth) made one of the best cases for it.
I remember having a conversation with my Med School roommate 28 years ago. He was asking why in the world I would invest passively and settle for average when I could outperform that? It was a good question that I struggled to answer.
Fewer people now ask that and there are more articulate people like WSP who can provide the answer. That sounds like progress to me.
Im still baffled by ETF funds vs. a fund like VTSAX. You mentioned that an ETF is more tax efficient, so whats the downside? Can you explain (briefly) for a nonfinancial wizard? Thanks!
VTIAX is the international fund, not S&P 500. Also, the extra ER of the investor fund only applies until you reach 10,000, and then the fund is converted to the Admiral fund share class (automatically quarterly or you can convert manually yourself). On $9,999 the extra ER would only be about $10 per YEAR. I would not make $10/yr the deciding factor. Minimal fee for the convenience of investing in the mutual fund, especially if that helps with the behavioral aspect of B&H.
FZROX is only available in Fidelity retail accounts (e.g. brokerage, Roth IRA). It is not even available through their Brokeragelink option. Would be great if they opened it up to other accounts.
I have an IRA with JP Morgan and a 401 K with One America, does anyone know what the equivalent of VTSAX would be with either of those firms so I can invest, or how I can find out? I never feel like the FA want to give me a straight and honest answer.
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