Many investors are taking this period of market upheaval and uncertainty to reassess their investment portfolios. Some see this as a time to get more aggressive in their allocations, while others are more risk-averse, given the uncertainty in the markets. As with any market environment, a solid portfolio incorporates a variety of investment strategies.
A great way to get that diversification is through an exchange-traded fund, or ETF. An ETF is a basket of stocks pooled together in a single fund that's traded on major stock exchanges.Each share represents a stake in the total assets of the ETF. The basket of investments generally tracks a benchmark or index with the goal of matching its returns and risk profile. Thus, most are passively managed.
Since they were introduced in 1993, ETFs had amassed more than $4 trillion in assets by the end of 2019.One of the largest ETFs is the Vanguard Total Stock Market ETF (VTI). If you are looking for a great ETF to add to your portfolio, you could do a lot worse than this one.
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Broad diversification
The Vanguard Total Stock Market ETF is the third-largest ETF, with about $129 billion in assets, behind only State Street's SPDR S&P 500 ETFwith $252 billion and BlackRock's iShares Core S&P 500 ETFwith approximately $177 billion.
Unlike those two behemoths, this ETF invests in a far broader base of stocks through the CRSP US Total Market Index. It includes investments in more than 3,500 stocks of all sizes and styles, and from all sectors across the New York Stock Exchange and the Nasdaq. It includes large-cap, mid-cap, and small-cap investments, as well as both growth and value stocks with the median market cap at $84 billion. It is classified as large-cap blend.
The largest holdings are Microsoft, Apple, Amazon.com, Alphabet, Facebook, Berkshire Hathaway, Johnson & Johnson, Visa, Procter & Gamble, and JPMorgan Chase. The top 10 holdings make up 22% of the portfolio. Overall, the ETF has 24% in technology, 17% in financials, and 15% in healthcare. The broad diversification allows it to perform in all different types of market cycles.
Bang for the buck
The long-term returns of this ETF are excellent. Over the last 10 years as of April 30, it has an average annual return of 11.3%, which outperforms the average large-cap blend fund over that period as well as the S&P 500. In that span, there was only one year where it had a negative return: 2018, when it fell 5%. This year, the ETF is down about 11%.
It also pays out a dividend. Currently, it is paying out $0.61 per quarter per share, down from $0.88 last quarter, at a yield of 1.92%. Keep in mind that the dividend will fluctuate based on the dividends of the underlying stocks in the ETF. The dividend is typically lower than other ETFs, which means it has lower taxable gains.
In addition to the solid returns, what makes it really stand out is its ridiculously low expense ratio of 0.03%. To put that in real terms, you only pay $3 in fees for every $10,000 you invest in the fund. That is one of the lowest out there, and lower than its major competitors, as the SPDR S&P 500 has an expense ratio of 0.09% and the iShares Core S&P 500 is at 0.04%. The average expense ratio of the large-cap growth ETF is 0.39%.
This is a perfect ETF for retirement investors, particularly those with a long time horizon who want the diversification, the steady returns, and the low fees without having to worry about market fluctuations. Buy and hold this ETF and it'll be there for you when you retire.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), Facebook, Microsoft, and Visa. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short June 2020 $205 calls on Berkshire Hathaway (B shares), short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.
