Leftovers In my opinion, the key to successful investing is to start (early in life…) building a well-diversified portfolio built for the long term and maintain it throughout the up and down market cycles. Following the advice of the legendary John Bogle, the cornerstone of my own personal portfolio is the Vanguard S&P 500 ETF (VOO), a highly profitable fund that allows investors to match the success of the S&P 500. However, my portfolio has other “cubes” too: dividend-paying stocks, tech stocks and funds, and sector plays like health and consumer staples, just to name a few.
Another part of my portfolio’s core holdings is the Vanguard Total Stock Market ETF (NYSEARCA:VTI), another low-cost Vanguard fund that casts an even wider net than the VOO S&P 500 fund; VTI has more than 4,000 companies. Investment Thesis The VTI ETF is designed to track the CRSP US Total Market Index, and you can find the most recent quarterly fact sheet for that index here. As you can see in the post, the index was developed by The Center for Research in Security Prices, LLC, an affiliate of the University of Chicago Booth School of Business.
The index has 4,070 companies, giving investors very broad exposure to the “total” market. The most recent sector allocation is shown below: CRSP As you can see from the chart, the index that the VTI ETF tracks is a very well-diversified portfolio across all major market sectors. Today I’m going to take a closer look at the VTI ETF and you can determine for yourself whether it deserves an allocation within your portfolio.
Top 10 Holdings The top 10 holdings of the VTI ETF are listed below and equate to what I consider to be a very well-diversified 23.6% of the entire portfolio of over 4,000 companies: Vanguard Unsurprisingly, Apple ( AAPL ) and Microsoft (MSFT) are the two largest holdings and together represent a point over 11% of the entire portfolio. By comparison, these two stocks equate to a 13% weighting in VTI VOO’s sister fund, the S&P 500 ETF.
Both companies have continued to generate excellent free cash flow through the 2022 bear market, and while that Apple has outperformed the S&P 500 YTD, Microsoft has lagged the S&P 500 by ~5%: AAPL data from YCharts Combining the two classes Alphabet (GOOG) (GOOGL) stock is the no. 3 exploitation with a weight of 3.2%.
Google is another company that has performed well this year. In its second quarter EPS report, Google announced that it had generated $12.6 billion in free cash flow and $1.21 per share in net income. The Google Cloud Platform (“GCP”) remains a primary growth catalyst for the company going forward.
Google ended the quarter with $125 billion in cash, and keep in mind that was after buying back $15.2 billion worth of stock during the quarter. Unlike many tech companies these days, Google’s stock buyback plan is outpacing the issuance related to employee stock compensation, and the fully diluted share count actually fell from 13.592 billion shares to 13.239 billion shares on a year-over-year basis. Google remains my favorite mega-cap tech company, and with a TTM P/E of just 22.5x, it’s very undervalued in my opinion. Tesla (TSLA) is the no. 4 exploitation with a weight of 1.9%. Tesla has really been on a roll this year, as Elon Musk’s bid for Twitter ( TWTR ) has seen him sell off a significant number of its shares. However, the stock is still up 28.6% over the past year, and another 3-1 stock split is set to take place after the close of trading today (Wednesday, August 24).
Two health conglomerates — UnitedHealth Group ( UNH ) and Johnson & Johnson ( JNJ ) — account for 2.3% of VTI’s portfolio. Healthcare stocks are usually a good place to gain exposure during times of high inflation and weak general markets. In fact, both stocks have performed well this year compared to the overall S&P 500, with UNH being a standout performer: UNH data by YCharts In addition to VTI’s health exposure, Berkshire Hathaway ( BRK.A ) (BRK.B) is another relatively defensive stock due to its very solid balance sheet. However, keep in mind that Berkshire’s No. 1 holding is Apple, and the SEC recently gave the company permission to buy up to 50% of Occidental Petroleum (OXY).
Berkshire is up 5.8% over the past year. Nvidia ( NVDA ) rounds out the top 10 holdings with a 1% allocation. Nvidia’s earnings (and share price — down 22% over the past year) have been hurt by a slowdown in demand for gaming chips and lower product prices overall. Perhaps somewhat underappreciated is that Nvidia has become a leading developer of AI/ML solutions. While NVDA faces some short-term headwinds, the company’s mid- to long-term potential is excellent in my view. That said, at a forward P/E of 45.7x, the company’s valuation may still be quite high. Here are some key metrics for VTI’s global portfolio: Vanguard Takeaways from these metrics are that valuation levels (P/E, P/B and ROE) are roughly in line with the S&P 500 and that VTI is, at all effects and purposes – a completely domestic fund (only 0.1% foreign exposure). With total net assets of $1.2 trillion, there are no liquidity issues.
Finally, the profitability was not shown, which at 1.42%, is not very considered in any case. That is, the income is not a reason to buy the fund, but at 1.42% it is not negligible either, as it will provide some downside protection. Performance Although the last 12 months (-9.9%) and YTD (-14.6%) returns are dismal, the VTI ETF has an excellent long-term performance track record of delivering an average annual return of 13.4% 10-year: Vanguard Interestingly, the VTI fund has underperformed the S&P 500 during the 2020 bear market and also lags over the 10-year period: Vanguard Fund Comparison Tool If this is the case, I wonder if having the 4000+ VTI portfolio is really that different. of the VOO S&P 500 ETF and, is it really giving me the added diversification (from a return perspective) that I thought it was? Risks The VTI ETF is not immune to the risks in the current macro environment: the lingering and negative impact of COVID-19, high inflation, the prospect of higher interest rates and Putin’s horrible election war in Ukraine which, when combined with sanctions on Russia by the US and its Democratic and NATO allies, has effectively disrupted global energy and food supply chains.
Any or all of these factors could lead to a global economic slowdown, a recession (or worse…) and put downward pressure on the value of the VTI ETF. Summary and Conclusion The VTI ETF is another low-cost, high-quality Vanguard fund with an excellent long-term track record. That said, the differentiation between VTI and VOO is not as big as I expected considering VTI has ~3,500 more companies in the portfolio compared to VOO.
My followers know that over the last few years, I have been pruning my portfolio to reduce the number of global holdings and hopefully increase the quality of the portfolio as well. This effort has resulted in a portfolio that is much easier to manage and track, and its performance, measured relative to the S&P 500, has improved overall. For now, I’ll keep the VTI ETF in my portfolio, but if it doesn’t seem to offer much differentiation to VOO (the cornerstone of my portfolio) over the next year, I might consider selling it and simply moving the proceeds into VOO. However, for now, I think now is an excellent time to take advantage of market volatility and add stock from time to time in VTI, which I rate a BUY based on its strong portfolio, valuation metrics and excellent long term lenses. performance history.