If I Could Only Hold 1 Vanguard ETF Forever, Here's What I'd Buy
Key Points
The Vanguard Total Stock Market ETF (VTI) invests in roughly 3,500 stocks and has an expense ratio of 0.03%.
It's better than the Vanguard S&P 500 ETF (VOO) because it includes mid- and small-cap stocks in its portfolio.
Investors can certainly build out around it, but the Vanguard Total Stock Market ETF should be the foundational piece of a portfolio.
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When it comes to identifying an investment that's appropriate to buy and hold forever, there should be a few things you look for. I'm preferable to ETFs, of course, because they provide simple and easy access to almost every corner of the market in a tax-efficient package.
From there, investors should screen for the following:
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- Funds that invest in stocks. For long holding periods, stocks simply have higher return potential than almost any other asset class.
- Funds with broad diversification. Core long-term buy-and-hold investments should invest in hundreds, if not thousands, of stocks covering all areas of the market.
- Funds with ultra-low expense ratios. S&P 500 (SNPINDEX: ^GSPC) and total stock market funds are easily available with ratios of 0.05% or less.
Many people would use the Vanguard S&P 500 ETF (NYSEMKT: VOO) for this purpose, and I can't blame them. It's certainly a strong core portfolio holding. I prefer to go broader, though, and choose the Vanguard Total Stock Market ETF (NYSEMKT: VTI).
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Why VTI works so well as a "hold forever" investment
The Vanguard S&P 500 ETF has diversification, but it focuses only on large-cap stocks. That leaves a large segment of the U.S. equity market unrepresented in a portfolio.
The Vanguard Total Stock Market ETF holds roughly 3,500 different stocks of all sizes, which is pretty much the entire investable U.S. stock market universe.
Large-caps have gotten most of the attention over the past few years because names like Nvidia (NASDAQ: NVDA), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), and Microsoft (NASDAQ: MSFT) have been driving the artificial intelligence (AI) trade.
But many people may not realize that the iShares Russell 2000 ETF (NYSEMKT: IWM), which invests in small-cap stocks, is beating the Vanguard S&P 500 ETF by 20 percentage points over the past year!
Investing in the Vanguard Total Stock Market ETF gives you exposure to this important area of the stock market. It generally has higher long-term growth potential, doesn't always perform like large caps, and can add important diversification benefits to a broader portfolio.
What buying VTI means for your portfolio
Most investors talk about picking winning stocks and sectors, but the core of a portfolio should be built around simply participating in the economic growth story.
It doesn't involve trying to time the market or predicting which stocks will outperform at any given moment. It's about simply investing in the entire market, expecting the U.S. economy to continue broadly expanding over time. With that in place, you can certainly build around that foundation with tech stocks, international stocks, cryptocurrencies, or anything else.
But the core of the portfolio should be broadly diversified across the entire market.
Because it's a foundational investment, the Vanguard Total Stock Market ETF can be held forever. Ideally, investors will be adding to it regularly over time to build long-term wealth even faster. In my opinion, it is one of the best vehicles for doing that.
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David Dierking has positions in Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends Alphabet, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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