The stock market is a proven wealth-building machine in the long run, but it can be intimidating at first.
For new investors, stock-picking can look bewildering and confusing. How do you build a diversified stock portfolio without any market experience?
Luckily, there's a very simple way to get started on the right foot. A broad market-tracking index fund gives you a huge shot of instant diversification, and then you can build on that rock-solid base by adding single stocks later. Give your investing style some time to develop before leaning on specific stocks, or even industries.
There are many reasonable choices, but it's hard to beat the diversification and stability you get from the Vanguard Total Stock Market ETF (VTI -1.08%). Let me show you why this exchange-traded fund (ETF) can be the perfect starting point for Wall Street's beginners.
The benefits of an index-tracking ETF
Buying shares of an ETF is just as easy as buying shares of a single stock. The fund is represented by a ticker symbol -- VTI in this case -- and its market price automatically reflects the average price moves of its components. Open a brokerage account, add some investable funds that you don't need for any other reason in the foreseeable future, and place a "buy" order for the ETF. A few seconds later, you'll be a fund owner and well on your way to mastering the details of successful investing.
Index funds are a special case. They tend to be passive, which means that another organization sets up and manages the list of stocks (or other assets) that should be included in the fund. Simply reflecting someone else's stock-picking research lets the fund manager do less work and charge lower annual fees.
And the target index can be very large. The Total Stock Market ETF, for example, currently reflects the market performance of 3,673 stocks, with a fee-based expense ratio of 0.03%. Any American stock you could buy on the open market is included in this ETF. Its target index "represents 100% of the US investable equity market." You want stability? Index funds will give you stability -- especially a large one like this Vanguard fund.
The Vanguard advantage
Many financial institutions offer index funds, and they are mostly interchangeable. Just keep an eye out for low management fee ratios, a decent amount of assets under management, and maybe a recognizable brand name, and you should be good to go.
That being said, Vanguard sets the gold standard for investor-friendly management practices.
Following the research and insights of founder Jack Bogle, Vanguard insists on passive index funds with extremely low fee ratios. Investors have noticed, making Vanguard funds some of the largest and most popular options on the market. Two of the four largest ETFs, measured by the amount of assets under management, come from the Vanguard portfolio today. The Total Stock Market ETF holds the fourth spot with a stock portfolio worth $499 billion today.
How the Total Stock Market ETF stands out
There is nothing quite like the Total Stock Market ETF out there. A few options come close, such as the iShares Russell 2000 ETF (IWM -1.46%) or the SPDR S&P 1500 Composite Stock Market ETF (SPTM -1.05%). Vanguard also offers several ultra-diversified index funds, including the Vanguard Russell 3000 Index ETF (VTHR -1.09%). You may want to look into these options and they might float your boat, but they will never be an exact replacement for the Total Stock Market ETF.
You see, this is the only ETF on today's market that reflects this particular market index. With more than 3,500 components, this index really does represent the entire American stock market. Smaller indexes like the Russell 300, Russell 2000, and S&P 1500 Composite also track thousands of tickers but will always offer less complete market coverage.
So it's no surprise that none of the alternatives I listed can compete with the Total Stock Market ETF's portfolio size. It comes with Vanguard's trademark of microscopic fees, and its long-term performance always sticks close to the popular S&P 500 (^GSPC -1.11%) benchmark. It has outperformed that index since its inception in May 2001.
This fund is extremely popular for all the right reasons. It is a paragon of stability, and its marketwide coverage lets you dive into deeper research in any corner of the stock market without feeling like you're going out of bounds.
So the Vanguard Total Stock Market ETF serves as the perfect launching point into a lifetime of wealth-building investment adventures. I would wish you the best of luck, but that's not even needed when your first investment follows the entire stock market!
