VTI - VTI: Much Better Positioned In Today's Market Environment (Rating Upgrade)

2023-08-23 23:42:00 ET

Summary

• The economic environment has been volatile, with short business cycles and inflation accelerating since early 2021.
• The Vanguard Total Stock Market Fund Index has performed well historically, but has struggled since mid-2021.
• Inflation levels have fallen, and the economy is expected to avoid a severe recession, making VTI a more favorable investment in the future.

The economic environment has been very fluid over the last several years. While long-term investors don't change their goals every year, people still often have to adopt their strategies even as their objectives remain the same. With Covid severely impacting markets and countries worldwide, inflation accelerating significantly starting in early 2021, and growth slowing this year, business cycles have been very short over the last 3 years.

One well-known exchange traded fund that seeks to track the overall market by being indexed to the CRSP US Total Market Index is the Vanguard Total Stock Market Fund Index ( VTI ). This ETF has remained very popular even during the period of recent market turmoil.

VTI has performed well since the fund's inception in the middle of 2001. This ETF has offered investors total returns 456.54% over the last 2 decades, while the S&P 500 has offered investors total returns of 428.98% during the same time period.

Still, this Vanguard fund has gone nowhere since prices began to rise significantly in the middle 2021.

VTI has offered investors total returns of just 7.42% since May of 2021. The S&P 500 has also struggled during this time frame, offering investors total returns of 8.99% over the last 2 years.

I last wrote about this Vanguard fund in February of this year. I rated this fund as sell primarily because this ETF is not well positioned for an inflationary environment because of the fund's minimal holding in the energy and basic material sectors, as well the exchange traded fund's heavy exposure to forex moves. Today, I am changing my rating of this ETF to Hold. Inflation levels have fallen for 11 of the last 12 months, and the current rate of price increases at 3.2% is just above the Fed's long-term goal of 2%. The dollar is also likely to weaken against the Euro and most major currencies as the current rate cycles comes to a pause and the EU and China see growth rates accelerate. The economy also looks likely to be able to avoid a severe recession.

The Vanguard Total Stock Market Fund Vanguard Total Stock Market Index Fund ETF Shares Holdings has 27.71% of the fund's holdings in technology stocks, 13.14% of its assets in health care stocks, 12.44% of the fund's holding in financials, 10.86% of the fund's assets in consumer cyclicals, 9.47% in the industrial sector, 7.95% in communication, 6.09% in consumer defensive stocks, 4.31% in energy stocks, 3.08% in the real estate sector, 2.48% in utilities, and 2.48% in basic material stocks.

This fund has $309.10 billion in assets under management, the expense ratio is .03%, and the yield is 1.53%. The 4 largest holdings of this fund are Apple ( AAPL ), Microsoft ( MSFT ), Amazon ( AMZN ), and NVIDIA Corporation ( NVDA ). This Vanguard ETF also holds .49% of the fund's assets Vanguard Total Stock Market Index Fund ETF Shares Holdings cash and cash equivalents. VTI seeks to track the CRSP U.S. Total Market index, which includes large, medium, and smaller cap companies.

VTI is a more aggressive growth fund that has fairly minimal holdings in defensive sectors, and this ETF also a low amount of exposure to commodities as well. This fund was not positioned well for an inflationary environment, and this ETF is also likely to underperform other more conservative funds if growth rates were to slow significantly. VTI struggled over the last 2 years primarily because of the fund's minimal holding in the energy and basic material sectors, as well as this ETF's significant exposure to forex moves mainly because of the fund's heavy exposure to large cap tech.

Today, inflation rates have fallen in 11 of the last 12 months, and the current rate of price increases is 3.2%, just barely above the Fed's stated target of 2%, the current rate cycle is likely to be paused soon. The energy crisis in Europe is also over, and China has finally opened their economy, global growth rates should accelerate next year. Predicting currency moves in the short-term is always challenging, but these factors should cause the dollar to fall against the Euro and most major currencies moving forward. The dollar has also already begun to pull back against the Euro after having reached a short-term peak in May of this year.

The economy also appears likely to be able to avoid a severe recession. The number of economists forecasting a recession has dropped over the last quarter from 70% to 58%, and a recent Philadelphia Fed survey of economists shows that most are predicting 1% growth this year. Most consumers still have savings from the pandemic that people can rely on, even with the recent drawdown most households have seen primarily become of inflation. Consumer savings remain at above average levels and the recent July and August jobs reports showed the economy remains steady as well.

VTI is a more aggressive growth fund that will likely be ideal for bullish investors who want heavy exposure to more cyclical sectors. While this fund predictably underperformed many more conservative investment funds during the recent period of inflation, this Vanguard fund should outperform most alternative investments in an environment where inflation levels ease and growth rate accelerate, which looks like the most likely scenario moving forward.

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