VT - One Fund To Rule Them All: VT

2023-09-22 20:17:07 ET

Summary

• Vanguard's Total World Stock Index Fund offers simplicity and convenience by serving as an investor's entire equity portfolio.
• VT holds over 9,000 unique stocks, providing broad exposure to various sectors and geographies.
• The fund's top holdings are predominantly American companies, but it also includes foreign companies with strong growth potential.

Introduction

Simplicity. Who doesn’t love simplicity?

Life, the world, and everything else seems to just get more and more complicated. Sometimes it's hard to keep track of it all.

That’s why, whenever I can in life, I try to cut out the surplus, choosing to focus on what’s essential. For me writing about the market and stocks is a passion, for most others, it's not priority. And that's fine! In fact, I have friends who consider these topics to be quite boring! Can you imagine? Investing, boring?? Jokes aside, it really isn't for everyone, nor should it be.

Some people just want something simple that works, they want to set it and forget it.

There are a number of “simple” investment strategies, such as only investing in what you know, 10 stock portfolios, ETF-only portfolios. But perhaps there is one strategy which is better than the rest: for those seeking simplicity, just invest everything in the Vanguard Total World Stock Index Fund ( VT ).

Vanguard’s VT fund delivers simplicity to investors in a radical way: one fund, which can serve as an investor's entire equity portfolio. And it's done this with strong performance as well:

How so? Curious to learn more? Well stick around for the rest of the article and I’ll tell you how they've done it.

Really, just one fund for an entire portfolio?

The idea of having a portfolio with one sole holding is likely shocking to many, after all, we’ve all been told that diversification is key. So how then, can one fund serve as an entire portfolio?? It seems like it almost cannot be true.

But it is.

And well… that's because, in a certain sense, the one holding is an entire portfolio all on its own.

You see, VT holds over 9,000 unique stocks within its ETF wrapper, 9,572 holdings to be exact. These holdings are spread across sectors like technology, healthcare, and utilities as well as geographies like North America, Europe, and Asia emerging and developed economies alike. Basically this fund holds anything and everything.

VT provides what I call “vanilla” coverage to the entire investable universe. Vanilla exposure means that the fund simply weights its holdings by the float-adjusted market cap without respect for metrics like growth, value, quality, momentum, or sector bets.

What this means is that you are essentially investing in “the market” as a whole instead of individual companies, meaning that the performance of your investment is more reliant on overall global economic output instead of individual names.

While this limits the upside to an extent, it also limits the downside. Apple ( AAPL ) is the largest holding of VT, and even its weight is less than 4% of the total fund. Meaning Apple could disappear and the fund would only lose ~4% of its value.

Geographic + Size Diversification Benefits & Risks

Many investors who opt for a passive investment strategy navigate to ETFs like ( VOO ) and ( SPY ). The problem with that strategy is two-fold, you miss out on all the foreign listed companies, juggernauts like Samsung ( SSNLF ), and LVMH ( LVMUY ), and you miss out on the early stages of small companies which may become the next juggernaut 10 years from now.

You see the S&P 500 is limited to just 500 of the largest US-listed companies. And of course, the US is one of, if not the best market, to invest in, it is not the entire market and there are great businesses that lie beyond the borders of the US. The same can be said for small-cap stocks.

Markets outside the US don’t always rise and fall at the same time either meaning that the overall performance of your portfolio may endure less volatility than those with a singular focus on the US.

A risk, to investing globally is currency fluctuations. Investing globally grants the investor exposure to foreign currencies which can create additional volatility. You see, for a US-based investor when a company’s shares move from $100 to $120 you know your return is 20%, on the other hand when a US-based investor invests in a European-based company trading for €100 that increases to €120 euro how much is the return for the US investor? It may not be 20% depending on where the foreign currency trades compared to yours.

But having exposure to different currencies is not always a bad thing, in fact, it can help to protect investors from foolish decisions made by a central bank. For example, if the Federal Reserve of the US chose to sharply devalue the US Dollar, you would have protection through other non-USD denominated holdings.

To gain the full benefits of this diversification Vanguard recommends an allocation of around 40% to international stocks outside the US; this fund invests 37% of its holdings outside the US. The next largest holding besides the US is Japan with a weight of 6.2% then the UK at 3.8% followed by China at 3%.

Largest Holdings

While the fund does indeed hold a great number of foreign holdings, the top 10 largest holdings, are all American, though this shouldn’t be too great a surprise as the US market is the most developed stock market in the world. Interestingly, you have to go all the way down to #17 on the list to arrive at the first foreign company: Taiwan Semi ( TSM ).

1. Apple 3.9%

2. Microsoft ( MSFT ) 3.4%

3. Alphabet ( GOOG ) ( GOOGL ) 2.1%

4. Amazon ( AMZN ) 1.7%

5. Nvidia ( NVDA ) 1.6%

6. Tesla ( TSLA ) 1.0%

7. Meta ( META ) 0.9%

8. Berkshire Hathaway ( BRK.B ) 0.8%

9. Eli Lilly & Co ( LLY ) 0.7%

10. Exxon Mobil ( XOM ) 0.6%

…

17. Taiwan Semi 0.5%

Strong Holdings

While the substantial market cap might be indicative of the quality of these businesses on its own, sure enough, their financial performance is strong too (for the most part).

While you don't need revenue growth to drive earnings growth, it certainly helps, and as you can see the fund's largest holdings have revenue growth in spades. Looking above we can see that Amazon has grown at an extraordinary clip boasting $538B in revenue over the last 12 months.

The two companies in the top 10 holdings with the least revenue, Eli Lilly and Nvidia are both known for providing highly profitable goods (drugs and computer chips respectively) meaning that low revenue might actually contribute to very high profits.

Beyond those 10 large American businesses, you can see in the chart above through VT's exposure to foreign companies the sort of growth you'll have exposure to from companies across the world like ASML ( ASML ), LVMH, and Novartis ( NVS ) just to name a few. If you invested in just the S&P you wouldn't get the same exposure.

Aside from those large caps you also gain exposure to companies like Badger Meter ( BMI ), MSCI ( MSCI ), and Universal Health Services ( UHS ) three small-mid companies which are growing like a weed. For those interested in learning more about Badger Meter I would suggest the article I wrote on it last year.

Other Stats

The fund has an overall earnings growth average of 15.1% and a moderate valuation of just 17.1x earnings. 15% earnings growth at 17x multiple? Hard to get a higher quality bargain than that. For comparison's sake, the S&P 500 has had higher earnings growth over the past 5 years (18%), but it trades at a significantly higher multiple (23x). This implies that for 20% higher historical growth one must pay a 35% premium highlighting the value that VT offers compared to the S&P.

Additionally, the companies earn an average return on equity of 16.5% which is much better than the average investor can invest their own money.

And the cherry on top is that the company only charges 7 basis points per year on your holdings, meaning $10k invested loses just $7 a year to fund management expenses!

Compared to peers that offer similar global exposure like iShares' ( URTH ) VT is much more liquid, another cost saver, and has a much lower expense ratio (7bps vs. 24bps).

Looking Forward

As global economies contend with the supply shocks induced by COVID and the war in Ukraine so too must they manage the impacts of abnormally high inflation. What's interesting about the environment we find ourselves in is that every country finds itself in a unique situation, for example in the US, there is still abundant oil whereas in Europe they are heavily reliant on importing fossil fuels. And then there's China, which has been a powerhouse of growth over the last few decades but is now suffering as more countries take a protectionist approach to local industries. The world is clearly in flux.

An investment in VT allows investors to be agnostic about which country will lead the pack in decades to come. Given the uncertainty that exists out there, this global exposure is, in my opinion, a strong benefit.

Conclusion

In a world of increasing complexity, simplicity can be a breath of fresh air. Vanguard's Total World Stock Index Fund offers investors the ultimate simplicity with a single fund that covers the entire global market. While it may challenge the conventional wisdom of diversification, VT's broad holdings provide a unique way to access the market's overall performance, offering both stability and growth potential.

Embracing this simplicity doesn't mean sacrificing diversification. VT's diverse portfolio of over 9,000 stocks across various sectors and geographies offers investors a well-rounded exposure to the global economy, making it a compelling choice for those seeking a balanced approach.

In short, I rate VT a "Strong Buy".

For investors looking for a one-stop shop, this is it.

For further details see: