There's One Main Reason Why Investors Have Shied Away From This Spectacular Vanguard ETF. It's Not a Good One.

With so many exchange-traded funds in the market, it's not surprising to see many investors focus almost exclusively on performance. If an ETF has had an exceptionally good year or two, then the odds of investors getting excited about it grow. Conversely, investors have little patience for poor performers, tending to shy away from them even if they have good future prospects. And if they've already bought a poorly performing ETF, they often sell it at the worst possible moment.

The thing that many investors don't fully understand about ETFs is that in some cases, getting the highest possible potential for returns isn't the primary goal. After all, diversification is generally at odds with immediately maximizing your potential profit, because owning just a single stock or two is much more likely to result in massive returns than owning hundreds or even thousands of stocks. Why diversification is helpful is that it also reduces the odds of a complete loss of capital by spreading your investment capital over many different stocks.

In that light, the Vanguard Total Stock Market ETF (NYSEMKT: VTI) has been extremely popular for giving investors the widest possible exposure to U.S. stocks. To the chagrin of many of its shareholders, though, it hasn't done as well as rival ETFs that focus on narrower market indicators. In this second article of a three-part series on Vanguard Total Stock Market ETF for the Voyager Portfolio, you'll learn more about the details of this underperformance and why long-term investors shouldn't necessarily avoid this Vanguard ETF even though it might seem like it has already lost the fight.

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Numbers don't like -- but they don't tell the whole story

I've set up Vanguard Total Stock Market ETF as if it's a terrible performer, but nothing could be further from the truth. The fund has actually enjoyed very good returns. Over the past five years, it's generated an average annual return of 12.12%. For the past decade, it has done even better, weighing in with average returns of 14.37% per year. And when you go back 15 years, Vanguard Total Stock Market posts a 13.05% return on average every year. When you compound those returns over long periods of time, you get massive multibagger performance that has played a big role in making shareholders wealthy.

The challenge, though, is that other ETFs have done better. Both of the ETFs that you've already seen in this March Voyager Portfolio series on exchange-traded funds, for instance, have outperformed the Vanguard ETF. The Invesco QQQ ETF (NASDAQ: QQQ), for instance, has generated 10-year returns approaching 20% per year on average, and 15-year returns of nearly 18% annually. Even the SPDR S&P 500 ETF (NYSEMKT: SPY), whose large-cap exposure perfectly overlaps the portion of the Vanguard Total Stock Market ETF that invests in big companies, has managed to do modestly better, posting returns of 14.76% annually since 2016 and 13.45% since 2011. And even though those differences versus the SPDR amount to less than half a percentage point, the impact on compounded returns when you run the numbers is huge.

Appreciate mid-caps and small-caps even when the market doesn't

Countless professional investors have bemoaned the fact that small-company stocks haven't kept up with large-company stocks. That's unusual, because ordinarily, the market gives an added risk premium to investors for putting their money in riskier young companies that don't yet have the established track records of their larger counterparts. But as you can see from the numbers above, it's been going on for a long, long time.

Nevertheless, smart investors look forward, not back. So even if investors in the Vanguard Total Stock Market ETF might feel like they haven't done as well as they could have in other ETFs, it's worth looking at whether a turnaround is likely to come. That's what the third and final article in this series for the Voyager Portfolio will address.

Dan Caplinger has positions in Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.