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Why Vanguard Total Stock Market Index Is One of the Best

Broad market exposure and low costs. What's not to like?

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Vanguard Total Stock Market Index (VTSAX) provides a diversified and low-turnover portfolio spanning the entirety of the investable U.S. equity market for a rock-bottom fee. These characteristics make it tough to beat and earn all of its share classes a Morningstar Analyst Rating of Gold, save for its investor class, which receives a Silver rating owing to its relatively higher fee.

The fund tracks the CRSP U.S. Total Market Index, which sweeps in all investable U.S. stocks. Stocks must pass its investability screens to be eligible, which include minimum market cap, public float ratio, and trading volume. Its small-cap exposures, though not substantial, can provide a performance edge over Morningstar Category peers when smaller stocks rally. Smaller stocks may be more difficult to trade, but CRSP uses multiple measures to mitigate turnover and reduce trading costs. There is a generous buffer band around the index's lower market-cap breakpoint to reduce turnover among its smallest holdings. The index also employs a "packeting" approach when migrating holdings across indexes, moving only a portion of the position at a time. It spreads the reconstitution process over a five-day period to mitigate potential market impact cost.

The index weights holdings by their float-adjusted market capitalization, which pulls the portfolio toward large-cap stocks. The U.S. large-cap market enjoys a high level of information availability and liquidity, allowing new information to be quickly incorporated into prices. Market-cap-weighting leverages those prices to determine each stock's weight in a cost-efficient manner. This approach promotes diversification and lowers unnecessary turnover.

However, market-cap-weighting may expose the index to significant stock- or sector-level concentration during the market's intermittent frenzies. This can tilt the portfolio toward richly valued names or sectors, as was the case during the late-1990s technology bubble. In the long run, the benefits of broad diversification, low turnover, and a low fee outweigh these drawbacks.

The fees for all of its share classes fall into the large-blend category's cheapest quintile. All of its share classes charge 0.04% or less annually, except for the investor share class, which charges 0.14%.

Key Proprietary Morningstar Metrics

Morningstar Analyst Rating: Gold
Process Pillar: High
People Pillar: Above Average
Parent Pillar: High

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Lan Anh Tran has a position in the following securities mentioned above: VTI. Find out about Morningstar’s editorial policies.