This Fan-Favorite Vanguard ETF Doesn't Tell the Whole Truth

Many investors mistakenly believe that in order to build a diversified portfolio using exchange-traded funds, you have to own a large number of different ETFs. It's true that with individual stocks, owning shares of at least a couple dozen different companies is useful in preventing a potentially catastrophic loss in your portfolio if something bad happens to one of your stocks. With ETFs, though, there's a level of diversification that's already built in, because the fund itself owns many different individual stocks that often move in different directions depending on market conditions. As a result, you might be able to get all the exposure that you need from a handful of ETFs.

Indeed, the Vanguard Total Stock Market ETF (NYSEMKT: VTI) aims to take the diversifying value of ETFs a step further. Its name suggests that if you need stock exposure, you need look no further than this fund. When you look more closely, though, you'll realize that this "total market" fund actually leaves out a huge portion of the stock market. In this third and final article on Vanguard Total Stock Market ETF for the Voyager Portfolio, you'll find out why the fund's name is a bit of a misnomer and why you might consider supplementing what seems to be an all-inclusive ETF with a different type of fund.

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What Vanguard Total Stock Market ETF includes and doesn't include

Vanguard Total Stock Market ETF deserves a lot of credit for bringing the value of small and mid-sized companies to investors' attention. It's easy to get carried away by all the coverage that the world's largest companies get, and feel that the smartest way to invest is to stay focused on those large-cap stocks. Indeed, when you look at recent performance, large-cap indexes have tended to outperform indexes that contain smaller stocks. Still, having modest amounts of exposure to more modestly sized companies gives investors the chance to score even larger returns on the businesses that will have transformative influence in the years and decades ahead.

But if you think that Vanguard Total Stock Market ETF is all you need to have a portfolio that covers every corner of the stock investing universe, you're making a mistake that's common among U.S. investors. The issue is that this Vanguard ETF invests only in U.S. stocks. That's a natural consequence of the index it tracks, but it leaves out stocks in every other country on Earth. And even though the market capitalization of U.S. stocks is the highest in the world, there's still a big selection of stocks that gets left out if you avoid international stocks.

Just as you saw with the underperformance of mid-caps and small-caps within the U.S., though, investors who've diversified their portfolios by including international stock exposure haven't been all that impressed with the performance. Until 2025, foreign stocks overall had generally underperformed their U.S. counterparts by a wide margin. Only last year, when the U.S. dollar weakened and investors saw opportunities for more attractively priced growth businesses elsewhere, did international stocks regain some of their past luster.

Getting the diversification you want

Fortunately, it's not hard to add just one additional international ETF to get a more complete view of the global stock market. If you already own Vanguard Total Stock Market, then the Vanguard Total International Stock ETF (NASDAQ: VXUS) fills in the global gap in your portfolio. And if you're just getting started, then you might take a look at Vanguard Total World Stock ETF (NYSEMKT: VT), which includes exposure to both U.S. and foreign stocks in a single investment vehicle.

The Voyager Portfolio won't be investing in Vanguard Total Stock Market ETF, but I do have some of my investment capital in shares of the fund. Those looking for an inexpensive way to get complete U.S. stock market coverage will appreciate the Vanguard Total Stock Market ETF's broad coverage -- even if it does leave out their foreign favorites.

Dan Caplinger has positions in Vanguard International Equity Index Funds-Vanguard Total World Stock ETF and Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard Total International Stock ETF and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.