The purpose of this article is to discuss the attractiveness of Vanguard Total Stock Market ETF (VTI) as an investment option. To do so I will review the funds recent and long-term performance, current holdings, and trends in the market to determine if this investment will be profitable in 2014. This ETF, and many others, have been very popular over the past few years, and the stock has risen consistently along with the general market. With the recent pullback and subsequent bounce, it appears to be an opportune time to re-examine this investment and see if it makes sense to continue to be long VTI going forward.
First, a little about VTI. VTI attempts to track the performance of the entire stock market, unlike other popular ETF's, such as the SPDR S&P Dividend ETF (SDY) or the iShares Select Dividend ETF (DVY), which track specific companies within the S&P 500 or Dow Jones, respectively. VTI is designed to track the performance of the MSCI U.S. Broad Market Index, which represents over 99% of the total market capitalization of all U.S. common stocks on the New York, American, and Nasdaq stock exchanges. The fund is managed by The Vanguard Group but employs a passive management strategy, as is similar with many ETFs. Currently, the stock trades at $95.90/share, and pays a quarterly dividend of $.49/share, which translates to an annual dividend of just over 2%. Year to date the stock is essentially flat, but over the past 52 weeks VTI is up over 22%, excluding dividend payments.
While the fund has performed strongly for investors over the past 5 years, with a return of over 130%, also excluding dividends, this fact alone does not differentiate it enough to justify holding it, as the market as a whole has performed extremely well. However, since the fund represents the broad market, the decision of whether or not to own this fund largely depends on if an investor expects the market as a whole to trend higher or lower in the coming months. I expect the market to continue its march higher over the next 6-12 months for a variety of reasons.
First, the Fed has reiterated its committment to an easy money policy. When the new chairwoman took over, many investors were concerned with how this would effect quantitative easing. Yellen has calmed nerves by stating she "strongly supports" the Fed's monthly bond purchases. While she does mention she will also continue with the taper, albeit in absence of a major market set back, we are still at a level of high amounts of bond purchases every month, and this is positive for equities. This loose fiscal policy has been an important catalyst for the stock market's strong performance, and based on the recent re-commitment to the policy, it should continue to be in the near-term.
Second, the U.S. economy is growing at a healthy rate of 3.2% (in the 4th quarter of 2013) and corporate earnings have been strong. This is also a trend I expect to continue which will also bode well for stocks. Unemployment has been steadily dropping and households are feeling wealthier given the strong market performance and rise in property values. Coupled with a fact that wealthly households remain underinvested and sitting in cash, there provides plenty of room for stocks to move higher as investors continue their search for higher yields. This search will lead them to safer investments such as VTI, that are properly diversified and sport a growing dividend.
While I expect the market to continue higher, and VTI along with it, there are a few reasons why I feel VTI makes for a good investment, as opposed to other options. One, VTI has been growing its dividend as large companies continue to return cash to shareholders. VTI's yield will increase as long as U.S. companies increases their payouts, something I expect to continue since U.S. companies are holdings excessive amounts of cash. VTI started 2013 with a dividend of $.36/share and ended the year with a dividend of $.49/share, an increase of 36%. While its current yield of 2% is nothing to get overly excited about, I expect that yield to grow. While many U.S. companies resorted to buying back shares in 2013, that trend is expected to slow as stock's reach record highs. In lieu of buying back stock at historic highs, expect to see large firms increase dividend payouts as their other mode to return profits to shareholders. Here is a recent report in the Wall St. Journal highlighting the expectations that stock buybacks will slow in 2014.
Investing in VTI is not without risk. There are other investment options that generate a higher yield and, of course, if the market heads south, VTI will go down with it. Additionally, many investors prefer to invest in specific industries or in funds with firms that share similar characteristics. VTI is broadly invested, so if a particular sector such as technology or health care outperforms, ETF's that track those industries will outperform VTI since those sectors make up a much smaller percentage of the total portfolio. However, I feel investors will continue to be drawn in to this fund for its broad diversification and much lower expenses when compared to traditional mutual funds that hold similar investment objectives. VTI sports a expense ratio of .05%, much lower that any actively managed fund. Low expenses allow investors to re-invest a higher percentage of their gains and over decades can add up to large sums of money.
Bottom-line: Investors can buy VTI and track the entire stock market at essentially the same price as buying a common share of stock. If the market continues its strong performance this year and investors continue to pour money into ETF's, VTI will be a direct beneficiary. With economic growth accelerating, unemployment in the U.S., and world-wide, declining, and a growing dividend yield, expect VTI to reward investors in 2014.