Meet The ETF That Tracks Everything and Costs Almost Nothing

While I wouldn't exactly call the Vanguard Total Stock Market ETF (NYSEMKT: VTI) the only investment you'll need to buy, it's pretty close. As the name suggests, it aims to track the performance of the entire U.S. stock market.

The ETF owns more than 3,500 stocks ranging from the largest mega-cap tech giants to small-cap stocks that you've probably never heard of. So, it's literally like buying thousands of stocks with a single click of a button.

Image source: Getty Images.

Another reason to buy the Vanguard Total Stock Market ETF is that it's a cheap way to invest. It has an expense ratio of just 0.03%, which means that if you have $10,000 invested, your annual investment fees and expenses will be just $3. (To be clear, this isn't a fee you have to pay -- it is simply reflected in the ETF's performance over time.)

Over the long run, the Vanguard Total Stock Market ETF can be an excellent wealth creator. Since the ETF's inception in 2001, it has averaged a 9.2% annual total return. For context, this means that investing $10,000 in the ETF when it was formed would be worth more than $90,000 today.

Drawbacks of the Vanguard Total Stock Market ETF

To be clear, the Vanguard Total Stock Market ETF could be an excellent core investment for any portfolio. But there are a couple of big drawbacks to mention.

First is the concentration risk. Although the ETF owns more than 3,500 stocks, it is weighted by market capitalization, meaning that larger companies make up a larger share of the fund's assets. In fact, 35% of the fund's performance is dependent on just the 10 largest companies. In other words, if Nvidia (NASDAQ: NVDA) or the mega-cap tech space as a whole slumps, this ETF would likely perform poorly.

Second, this is a U.S. stock market ETF. Many financial advisors suggest that you should have at least some exposure to international stocks to create a well-diversified portfolio. This is what I meant earlier when I said that this may not be the only investment you'll need to buy. It also doesn't have exposure to fixed-income assets (bonds), which are also a key component of most portfolio strategies -- especially as you get closer to retirement age.

The bottom line is that the Vanguard Total Stock Market ETF allows you to put your investing on autopilot by literally investing in the entire U.S. stock market in a single, low-cost investment. However, it isn't without its drawbacks, so be sure to understand the pros and cons before you buy shares.

Matt Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.