If This ETF Is Not in Your Portfolio, It Might Be Time to Ask Why

Most investors think they have a diversified portfolio. While they might hold 10 or more stocks, they probably aren't truly diversified across sectors, market capitalization, and style (i.e., growth, value, and dividends).

It's easy to rectify that problem. Buying shares of the Vanguard Total Stock Market ETF (NYSEMKT: VTI) would instantly diversify your portfolio. Here's why you might want to ask yourself why you don't already own this top ETF.

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Own the entire U.S. stock market through a single fund

The Vanguard Total Stock Market ETF has a very simple investment strategy. It aims to track the performance of the CRSP U.S. Total Market Index. The index covers the entire investable universe of U.S. stocks, rather than capping its membership to 500 companies, as the popular S&P 500 Index does. As a result, the ETF invests in every publicly traded company, from mega caps to micro caps.

The fund currently holds over 3,500 stocks, about 3,000 more than the S&P 500. As a result, it provides exposure across all market capitalization levels (the S&P 500 comprises the 500 largest companies). The fund's top holding is Nvidia at 6.4% of its assets (compared to 7.6% in an S&P 500 ETF). Meanwhile, it provides exposure across all stock market sectors, led by technology at 36.3%, slightly higher than the S&P 500's 32.9% exposure.

Low costs and high returns

The Vanguard Total Stock Market ETF's broad exposure to the entire U.S. stock market isn't its only draw. The fund has also delivered excellent returns over the years. It has produced an annualized return of 13.7% or more over the last one-, three-, five-, and 10-year periods. Meanwhile, its annualized return since inception in 2001 is a solid 8.9%.

To put that return into perspective, a $10,000 investment in the fund would grow to more than $84,000 in 25 years at an 8.9% annualized rate of return. Meanwhile, investing an additional $100 a month would grow it to over $189,000.

The Vanguard Total Stock Market ETF delivers strong returns at very low cost. Its ETF expense ratio is only 0.03%, or $0.30 per year for every $1,000 invested. That compares to the industry average of 0.23%, or $2.30 per $1,000 invested.

A no-brainer investment

The Vanguard Total Stock Market ETF is a great core holding to complement your stock portfolio. It provides diversification while delivering solid returns at a low cost. Unless you already own another broad market index fund, you should consider adding this top-notch ETF to your portfolio.

Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.