Get Off The Roller Coaster With Vanguard Total Stock Market ETF

| About: Vanguard Total (VTI)


2016 began with whiplash volatility that has shaken investors.

Dovish Federal Reserve actions confuse markets and hint at decline in global economic growth. Concerns grow about continued volatility in equities and a potential for greater downside risks.

The Vanguard Total Stock Market ETF has been a long-term highly diversified winner tracking the U.S. Stock Market. The investment approach, key fund facts and weighting clarify its structure.

Comparative performance with other funds show a commanding lead for 3, 5 and 10 year average performance which includes a dividend yield of 2.2%. Ten year cumulative growth is 97.2%.

Some investors may consider VTI as a place to seek refuge.

Roller coaster start for investors in 2016

This year, evidence of stress came early as the market dropped like a brick before swinging back up like a rocket. Rampant, wrenching, volatility is maddening for many investors who see no choice but equities for financial gains in the current low interest rate savings environment. Picking individual stocks is risky in a traders' marketplace. For the long-term investor, a maximally diversified ETF may reduce stress helping to weather short-term shocks like those that were seen last January while offering modest gains across a 5 to 10 year time horizon and greater peace of mind.

Volatility and Downside Risk

Recent Fed commentary and behavior can only confuse the Markets, and that spells continued and perhaps even greater volatility. The contradictory nature between the "Fed speak" of the Chair, Janet Yellen, and other members of the FOMC has sent mixed messages about removing unprecedented accommodation from U.S financial markets. Yellen's dovish response to maintain low interest rates in the U.S. signals a fear of declining global economic growth.

The picture concerning the future direction of interest rates is clouded and that presages the possibility of a continued roller coaster stock market ride.

At Fortune's Global Forum, JPMorgan (NYSE:JPM) CEO, Jamie Dimon, hinted at expected greater volatility stating that, "markets will be scary until a normal interest rate environment returns."

This view is mirrored in the recent low interest rate of the 10 year U.S. Treasury Bill which has fallen to 1.77% as scared money retreats from the markets.

For some savvy traders, volatility may translate into higher short-term returns, but this isn't always the case because the psychology of greed, and more importantly, in my experience, of fear, can reverse markets on a dime. This can result in devastating losses for some market segments as well as individual stocks.

On the other hand, the average investor, by nature, tends to be a long-term animal, and that means having to contend with both volatile whiplash swings as well as the fear of downside market risks.

It has always been a maxim for me to take both volatility and downside risk into consideration when I am in investment mode. I have also come to believe that volatility does not always translate into higher returns. Diversification is a great tool for dealing with both volatility and downside risk.

Vanguard Total Stock Market ETF

The Vanguard Total Stock Market (NYSEARCA:VTI) ETF is a significantly diversified proven winner. It seeks to track the performance of a benchmark CRSP U.S. Total Market Index.

The investment approach is focused on:

  • Large-, mid-, and small-cap equities diversified across growth and value styles.
  • A passively managed, index sampling strategy.
  • Maintaining a fully invested fund utilizing low expenses to minimize net tracking errors.
  • Accurately representing the U.S. equity market while delivering low turnover.

Key Fund Facts

Clearly, a key fact for investors to consider is the expense ratio for purchasing the ETF. As of 04/28/2015 it is 0.05% and compares very favorably with the Lipper peer average expense ratio of 1.17% as of 12/31/2005.

Total net assets are $389.8 billion as of 02/29/2016. Outstanding shares are 560,322,004 as of 03/31/2016.

The risk and volatility Beta based on the 5 year Primary benchmark and the Broad-based benchmark is 1.00.

Sector Weightings

Courtesy of the Author

As noted in the chart above, at present the heaviest sector weightings are in Financials, Technology and Consumer goods while the lowest are in Basic materials, Telecommunications and Utilities.

Comparative Performance

Courtesy of the Author

Of the 13 funds listed in the table above, VTI leads the group with a ten year average return of 6.13% while maintaining a maximum level of diversification. The 3 and 5 year returns are 8.21% and 8.63%, respectively.

Short-Term Performance

The fund's overview is described by the table below. It is highly capitalized and provides a 2.2% dividend yield as well as capital gains.

Courtesy of the Author

Although VTI shows a loss for the first three months of this year and an -8.2% one-year return, it sports a 10% total market return for the last three years during a period of exceptional market volatility.

Cumulative Long-Term Performance

Courtesy of the Author

Long-term cumulative performance over 10 years is 97.52% with a cumulative performance of 133.12% since inception on 05/24/2001.

VTI 5 Year Chart

A 5 year weekly stock price chart shows strong performance. Extrapolating data from the chart shows a low close of 51.04 on October 3, 2011 and a close on April 4, 2016 of 105.04 for a share value gain of 51%. This corresponds to an approximate 5 year annual gain of 8.3% seen in the Betterment Comparative Performance chart provided above.

Courtesy of the Author

VTI Bounce-Back As Market Recovered

Courtesy of the Author

VTI showed a strong bounce-back in mid-February of 2016 following the volatile 10% market decline that took place during January 2016.

Additional data supporting VTI which is also available as a mutual fund can be reviewed on the Vanguard site.

Where Should We Be In The Market?

Nobody can call the market; we can only consider economic variables and try to place ourselves in the best situation to profit from our investments, and most importantly, to avoid significant financial loss. We can also learn from past experience if we are in a position where we are personally vulnerable to the stressful impact of severe market swings.

I am not sanguine in my near-term expectations that stock markets can continue to rise in the current cycle. I make no predictions, but point out the following for your consideration:

  • U.S. Market Indices are nearing highs in a climate of weak global economic conditions.

But, I cannot know what will happen in the longer term and therefore the choice of selling my portfolio and exiting the stock market is a poor choice in my opinion. I consider the U.S dollar to be the strongest currency and the U.S. economy to have the greatest potential to generate wealth given better economic policies. The question for all investors now is, where do you feel the most comfortable putting your money?


Remaining invested for the near term, in my opinion, requires the broadest diversification in the strongest companies, and I consider the U.S. the best place to be at this time. The Vanguard Total U.S. Market ETF may be a place for some investors to seek refuge.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VTI over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information and data that comprise the content of this article came from external sources that I consider reliable, but they have not been independently verified for accuracy. Although I reserve the right to express points of view, they are my reasoned opinions, and not investment advise. I am not responsible for investment decisions you make. Thank you for reading and commenting.

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