Now Is The Time To Buy The Vanguard Total Stock Market ETF

Jun.10.14 | About: Vanguard Total (VTI)

Summary

VTI is a low-cost way to diversify a portfolio.

The market should continue to trend higher, benefiting VTI.

With exposure across all sectors, VTI can perform well in up and down markets.

The purpose of this article is to discuss the attractiveness of the Vanguard Total Stock Market ETF (NYSEARCA:VTI) as an investment option. To do so, I will review the fund's recent and long-term performance, current holdings, and general trends in the market that may affect the fund. It is no secret that the stock market has been on a tremendous tear recently, breaking new highs on what seems to be a regular basis. VTI is a fund that is a direct beneficiary of this performance but, with the DOW trading at record levels, it is time to re-examine the fund and see if it continues to make sense to own.

First, a little about VTI. VTI attempts to track the performance of the entire stock market, unlike other popular ETFs, such as the SPDR Dividend ETF (NYSEARCA:SDY) or the iShares Select Dividend ETF (NYSEARCA:DVY), which track specific companies within the S&P 500 or Dow Jones, respectively. VTI is designed to track the performance of the CRSP U.S. Total Market Index, which gives investors exposure to the three major indexes, virtually all sectors, and literally thousands of stocks, all within the same fund. The fund is passively managed by The Vanguard Group, giving it an expense ratio of just .05%, which is 95% lower than the average expense ratio of funds with similar holdings, according to Morningstar. Currently, the stock trades at $101.30/share and pays a quarterly dividend of $.42/share, which translates to an annual dividend of 1.65%. Year-to-date the stock is up over 5.5%, and over the past 52 weeks, is up 19.5%, excluding dividends.

Clearly, VTI has performed strongly over the past year, as the market has been without any meaningful correction since late January. Quite simply, a bet on VTI is a bet on the stock market as a whole, so it is important to examine macroeconomic factors when considering this fund. Rather than examining a particular sector or stock, I would consider VTI a solid investment when overall market sentiment is good and I expect the majority of stocks to trend higher. To illustrate my point, see the list below, which highlights the top ten largest holdings of VTI as of 4/30/2014:

1. Apple Inc. (NASDAQ:AAPL)
2. Exxon Mobil Corp. (NYSE:XOM)
3. Microsoft Corp. (NASDAQ:MSFT)
4. Google Inc. (NASDAQ:GOOG)
5. Johnson & Johnson (NYSE:JNJ)
6. General Electric Co. (NYSE:GE)
7. Wells Fargo & Co. (NYSE:WFC)
8. Chevron Corp. (NYSE:CVX)
9. Berkshire Hathaway Inc. (NYSE:BRK.A)
10. Procter & Gamble Co. (NYSE:PG)
Click to enlarge

These ten stocks collectively make up roughly 15% of VTI's portfolio, and it would be hard to select a finer group of companies. VTI gives investors exposure to some of the largest, most successful companies in the world, and the cost of doing so is substantially cheaper than buying these stocks individually. Additionally, the fund is made up of cyclical and defensive sectors and stocks, so VTI should perform relatively well during good times and bad. Here is a complete list of the sectors that make up VTI:

Basic Materials 3.10%
Consumer Goods 10.00%
Consumer Services 13.00%
Financials 18.40%
Health Care 12.10%
Industrials 13.20%
Oil & Gas 9.60%
Other 0.00%
Technology 15.10%
Telecommunications 2.20%
Utilities 3.30%
Click to enlarge

I like that no particular sector makes up more than 20% of the fund, so the fund does indeed live up to the diversification expected with its name. Additionally, with interest rates set to rise over the next 12-18 months, I particularly like that VTI's exposure to the utilities sector is under 4%, because that is a sector that historically underperforms during times of rising rates.

I stated before that investing in VTI only makes sense if you feel the market is about to trend higher, and I do for several reasons. Of course, given the market's performance recently, it is natural to be cautious, but there are a few reasons I feel it is a profitable time to invest in stocks. One, the labor market has been healing. The economy has been regularly adding jobs, and the unemployment rate has been consistently declining, notably surpassing Wall Street's recent expectations. After the most recent jobs report, which stated that the U.S. added 217,000 jobs last month and the unemployment rate stayed at 6.3%, the market rose steadily, as the Wall Street consensus was that the rate would rise slightly. This is a positive development from two perspectives. The first is that more people are gaining employment, which should boost consumer spending, and hopefully, wages. The second is the unemployment rate did not actually drop, which will give the Fed an additional reason to continue its stimulus and continue propping up the market. Both of these occurrences will be positive for stocks.

Second, American household wealth has been increasing at a rapid pace, a result of stock market gains, positive employment numbers, and gains in home prices. American households are now worth over $70 trillion, well up from a recession-era low of $54 trillion, and at about the record level set before the crisis of $66.9 trillion. As household wealth increases, consumers will begin to feel more confident about their spending levels and the future in general. This should boost consumer spending, help heal the housing market as more households get "above-water" and feel confident enough to sell, and contribute to continued gains in stock prices.

Of course, investing in VTI is not without risk. There is plenty of bearish sentiment in the market right now, and geo-political risks seem to be an increasing threat throughout much of the world. However, civil unrest has not been disrupting the market thus far, so avoiding the market for that rationale seems ill-advised at this time. Another downside to VTI is its heavy reliance on American stocks. VTI is made up of almost no foreign holdings, so investors looking to gain exposure to Europe or emerging markets will not be completely satisfied with this fund. Recently, European stocks have not performed as well as American stocks; so many investors are looking to Europe for cheaper P/E ratios and more upside potential. Given that European Central Bank President Mario Draghi recently announced new quantitative easing measures in Europe this past week, there could indeed be some upside to the European markets right now that investors would miss out on by investing solely in VTI. However, many of the companies that are large holdings in VTI, such as GOOG, CVX, and GE are increasingly doing more business overseas and stand to benefit when international economies perform strongly. So investors will get some European and other international exposure indirectly through these companies.

Bottomline: The market has performed strongly, and VTI has risen along with it. While there are some headwinds facing the market right now, stocks continue to climb, and investors who remain on the sidelines are getting punished. As ETFs continue to be a preferred choice for many investors, VTI should continue to attract inflows and rise in price going into 2015. This investment option is one of the cheapest ways properly diversify a portfolio, and I would encourage investors to take a serious look at this fund.

Disclosure: I am long VTI, DVY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.