What Long-Term Investors Should Know Before Buying This Broad Market ETF

The Vanguard Total Stock Market ETF (NYSEMKT: VTI) owns roughly 3,500 U.S. stocks. That sounds like strong diversification for a single fund. It isn’t.

The problem exists with the top-heavy concentration at the top of the portfolio. The fund’s top three holdings are Nvidia, Apple, and Microsoft. Combined, they account for 17% of the fund’s assets. Top-10 holdings account for 32%. That’s a lot of influence from just a handful of stocks.

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The concentration problem inside total market funds

This is a consistent problem that occurs in almost any exchange-traded fund (ETF) that weights its holdings by market cap. In any S&P 500 fund, such as the Vanguard S&P 500 ETF, between 30% and 40% of the portfolio is in less than a dozen stocks.

It gets worse in sector funds. The VanEck Semiconductor ETF has nearly 50% of its portfolio in just five stocks: Nvidia, Taiwan Semiconductor Manufacturing, Broadcom, Intel, and Advanced Micro Devices. The State Street Energy Select SPDR ETF has 39% of its portfolio in just two stocks: ExxonMobil and Chevron.

True diversification doesn’t come from the number of stocks in a portfolio. It depends on the weights of those components and how much idiosyncratic risk a fund exposes its shareholders to. If you’re investing in a total market fund, odds are you’re making a larger bet on fewer stocks. It’s best to understand this before you dive in.

Should you buy stock in Vanguard Total Stock Market ETF right now?

Before you buy stock in Vanguard Total Stock Market ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard Total Stock Market ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $476,034!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,274,109!*

Now, it’s worth noting Stock Advisor’s total average return is 975% — a market-crushing outperformance compared to 206% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.

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