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Key Points
The Vanguard Total Stock Market ETF (VTI) invests in roughly 3,500 U.S. stocks, making it one of the best diversified, low-cost investments available.
I prefer the VTI over the Vanguard S&P 500 ETF (VOO) because of its 10%-15% allocation to mid-cap and small-cap stocks.
With the small-cap earnings outlook significantly improving, this could be the catalyst that turns VTI into an outperformer.
If I could only own one ETF right now, I'd buy the Vanguard Total Stock Market ETF (NYSEMKT: VTI). By owning roughly 3,500 U.S. stocks, it's one of the most diverse ETFs you'll find. It's the ideal foundation for building the rest of your portfolio. And with an expense ratio of just 0.03%, it costs almost nothing to own it.
Why choose a total stock market ETF over the S&P 500?
The biggest selling point for this fund, in my opinion, is that it targets the entire investable U.S. stock market. A lot of people will use something like the Vanguard S&P 500 ETF (NYSEMKT: VOO) for this purpose. I don't blame them, and it's a perfectly reasonable choice for a portfolio centerpiece.
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But I prefer the Vanguard Total Stock Market ETF's all-cap approach versus the S&P 500's large-cap focus. Mid-cap and small-cap stocks only make up around 10% to 15% of the portfolio overall, but it's important to include them. Smaller companies have historically experienced extended periods of outperformance relative to large caps, and investors should want that in their portfolios. Plus, the Vanguard Russell 2000 ETF (NASDAQ: VTWO), a proxy for small-caps, has a much different sector composition than the Vanguard S&P 500 ETF. That diversification can also help smooth out the ride in the long term.
The S&P 500 is as top-heavy as it's ever been right now. The Vanguard Total Stock Market ETF isn't much better because it also weights by market cap, but it offers better diversification.
Why VTI is a better choice than VOO for your portfolio right now
Small-cap performance has clearly been an anchor on total stock market ETFs for several years. That's largely been a function of this group's relatively poor financial performance.
Earnings growth for small-caps had been minimal at a time when large-cap earnings were still growing at a healthy rate. That's quickly becoming a thing of the past. Earnings growth for the S&P 600 Small Cap Index is expected to come in around 18% in 2026 and another 18% in 2027. That puts small-caps in a much healthier position today and could mean they finally take advantage of some of the relative value currently built into share prices.
That puts all-cap funds like the Vanguard Total Stock Market ETF in a comparatively advantageous position for the first time in a while. That's why I believe this is the one fund to own both in the short-term and long-term. It won't always outperform, but its diversification, low cost, and ability to capture the entire market instead of just a subset are what set it apart.
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David Dierking has positions in Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
