For as little as $1, investors can gain exposure to thousands of companies through low-cost exchange-traded funds (ETFs). Among the most notable are those that track the S&P 500. The Vanguard S&P 500 ETF boasts an impressive $1.37 trillion in net assets, while other popular funds such as the SPDR S&P 500 ETF and the iShares Core S&P 500 ETF each hold over $650 billion. Meanwhile, the Invesco QQQ Trust, which mirrors the performance of the Nasdaq-100, has amassed over $365 billion in net assets.
However, a standout in this arena is the Vanguard Total Stock Market ETF (VTI), which has recently exceeded the $2 trillion mark in net assets. This ETF differentiates itself from S&P 500 index funds, making it a compelling option for long-term investors.
The S&P 500 index represents 80% of the U.S. stock market, spotlighting major players such as Nvidia, Microsoft, and Apple, which together account for a significant 20% of the index. Additionally, a group of ten prominent growth stocks forms nearly 39% of the S&P 500, indicating the influence of a few mega-cap companies. In contrast, the Vanguard Total Stock Market ETF features over 3,500 components compared to just 504 in the Vanguard S&P 500 ETF, thus covering the entire spectrum of the U.S. stock market. Both funds maintain the same low expense ratio of 0.03%, which translates to only $0.30 for every $1,000 invested—making the Total Stock Market ETF an equally cost-effective choice.
While the Vanguard S&P 500 ETF has slightly outperformed the Total Stock Market ETF over the last decade, largely due to its exposure to mega-cap stocks, the latter offers a broader market capture.
The potential for diversification made accessible through low-cost ETFs enables investors to build portfolios without requiring substantial capital. Both the Vanguard Total Stock Market ETF and the Vanguard S&P 500 ETF permit minimum investments of just $1, a concept that would have seemed unthinkable just a couple of decades ago.
Investors seeking a broader representation of the U.S. economy may find the Vanguard Total Stock Market ETF particularly advantageous. Although the S&P 500 constitutes a major portion of the overall market, those who invest in the Total Stock Market ETF can expect similar performance, albeit with a slight reduction in exposure to the largest companies.
In navigating these funds, it’s essential for investors to clarify their investment objectives. ETFs can play various roles in a diversified portfolio. For instance, those interested in artificial intelligence can explore AI-focused ETFs, or growth stock investors may benefit from high-yield ETFs. This approach is particularly beneficial when targeting specific investment themes where high-conviction ideas are lacking.
Conversely, acquiring ETFs that overlap with existing holdings can lead to duplication and hinder diversification. For example, if an investor’s portfolio is already heavily weighted with stocks like Nvidia, Microsoft, and Apple, investing in an S&P 500 ETF may ultimately offer little additional exposure due to the significant proportions these companies represent.
As a result, the Vanguard Total Stock Market ETF serves as an ideal choice for those looking to passively invest in a wide array of U.S. companies without aiming for specific thematic exposure, providing a catch-all strategy for market participation.
