If You're 25 and Just Starting Out, This Is the Only Vanguard ETF You Need for the Next Decade

If you're someone younger who's looking to invest for the first time, make life easy on yourself: Don't try to pick the next hot tech stock.

Don't be tempted by a leveraged S&P 500 exchange-traded fund (ETF) thinking that you'll simply double or triple what the index earns over time. Look to build a firm foundation for your portfolio first. For me, that means investing in the Vanguard Total Stock Market ETF (NYSEMKT: VTI).

Why I prefer this over an S&P 500 ETF

A lot of people prefer to use the Vanguard S&P 500 ETF (NYSEMKT: VOO) for the core of their portfolios. That's certainly a defensible pick, and I have no issue with anyone who wants to use it.

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My chief complaint is that it's incomplete. It invests only in U.S. large-cap stocks. And it's heavily concentrated in just the top 10 to 12 names, too. That's a lot of faith to be putting into just a dozen stocks, especially with most of them being in the tech sector.

The Vanguard Total Stock Market ETF helps fix that issue. It's also a cap-weighted index, so you'll still have that concentration at the top of the portfolio. But it invests in the entire investable U.S. stock market.

That's roughly 3,500 stocks in total, versus the roughly 500 stocks within the S&P 500. Because you're including smaller companies, you get around 10% to 15% of the overall portfolio targeting mid-cap and small-cap stocks.

That's simply better diversification built to deliver above-average growth potential over time.

Why this fund works for younger investors

The U.S. stock market has been driven heavily by large caps over the past few years. This has been due to a few factors:

• The biggest spenders and beneficiaries of the initial wave of the artificial intelligence (AI) boom have been the biggest companies, including Nvidia and Alphabet.
• Large-cap earnings growth has been strong, while small caps have actually experienced an earnings contraction over the past couple of years.
• When volatility picks up, investors tend to gravitate back to the larger companies they're familiar with.

But those trends are beginning to reverse. Small-cap earnings growth has turned positive again and is expected to outpace that of the S&P 500 in 2027. Small caps also tend to trade at lower valuations overall compared to large caps. Reflecting these trends, small caps have outperformed large caps over the past year.

Historically, small caps have outperformed large caps over time, even though that hasn't necessarily been the case over the past decade. Including them in your portfolio helps enhance long-term return potential beyond what's offered exclusively by larger companies. And the ETF is a great core portfolio holding with an expense ratio of just 0.03%.

There's often a belief that successful investing involves doing hours of research on hundreds of different securities. In reality, the best strategy may be the simplest one of all. That's the Vanguard Total Stock Market ETF.

David Dierking has positions in Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.