VTI-Is this truly the total us stock market?

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csm14
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VTI-Is this truly the total us stock market?

Post by csm14 »

Hi,

I currently use VTI (Total US Stock) as my domestic equity allocation.
I know I'm probably fine, but does the VTI small cap allocation match the recommendations of the other well-regarded "lazy" portfolios?
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FiveK
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Re: VTI-Is this truly the total us stock market?

Post by FiveK »

You're fine.

See Approximating total stock market - Bogleheads along with Lazy portfolios - Bogleheads to judge for yourself.
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JoMoney
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Re: VTI-Is this truly the total us stock market?

Post by JoMoney »

VTI tracks the CRSP US Total Market Index the index is designed to be investable, so it does have a construction methodology which may exclude some listed stocks because of liquidity issues, or some other reasons... but for most purposes it's close enough to 100% coverage.
As far as weighting of small-caps or any individual stock or sector, they're held at the float-adjusted weighting as they are represented in the market.
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livesoft
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Re: VTI-Is this truly the total us stock market?

Post by livesoft »

Many well-regarded lazy portfolios overweight small-caps, so VTI does not match many lazy portfolios. It matches the Total US Stock Market index.
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hightower
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Re: VTI-Is this truly the total us stock market?

Post by hightower »

csm14 wrote: Mon Dec 11, 2017 12:15 am Hi,

I currently use VTI (Total US Stock) as my domestic equity allocation.
I know I'm probably fine, but does the VTI small cap allocation match the recommendations of the other well-regarded "lazy" portfolios?
A lot of people use VTI or equivalent and then tilt to small caps or REIT or others with maybe a 10% holding. You can do the same if you're wanting more exposure there.
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nisiprius
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Re: VTI-Is this truly the total us stock market?

Post by nisiprius »

Yes and no. Yes, it is very darned close to any reasonable definition of the total U.S. stock market.

Does it match what is recommended for U.S. stocks in "lazy portfolios" is trickier. It is one of the recommendations to represent U.S. stocks in a three-fund portfolio. In my personal opinion, the market weight of small-cap stocks is just fine, and that adding other funds in order to overweight small caps or create a small-cap tilt gets into into the weird area of "there might be something to it, and then again maybe not, let's steep ourselves in data and have very long discussions about it."

Notice that even such a thing as "is this stock part of the U.S. stock market" is, like all classifications, subject to judgement and opinion. For example, the S&P 500 index contains companies domiciled in Ireland (Accenture), Switzerland (Garmin), and Bermuda (Everest Re). The committee that defines the S&P 500 index surely has their reasons for considering these to be U.S. stocks. Nevertheless, even if two index providers don't list exactly the same 3,599 stocks... and even if index funds don't track the index with absolute precision... index funds as a group do a fine job of doing what you expect them to do.

Your best guide to how VTI compares with other mutual funds and ETFs that claim to represent the total U.S. stock market is to use a tool like Morningstar.com's growth charts, but with ETFs be sure you are comparing growth charts and not price charts. On Morningstar, one way to do this is to plot a mutual fund for the "quote" and ETFs as "compare to's." Another way is to use a link like http://quotes.morningstar.com/chart/fund/chart?t=VTI (thanks, lack_ey for that trick) and change the ticker symbol as needed. So, for example, let's look at how much it matters if we use VTI or, let's say, ITOT, the "iShares Core S&P Total U.S. Stock Market ETF." Here's what you'd see as your account balance if you put VTI and ITOT in each of two brokerage accounts, with dividends reinvested:

Source

Image

Generally speaking, many "lazy portfolios" contain either a total U.S. stock market fund or an S&P 500 index fund. By the way, you may be surprised, if you take the time to do the plot, how little difference there is between the S&P 500 and the total market. I use a total market fund, I think it's the right thing to do, but there isn't much difference because a) the S&P 500 includes 80% of the market by dollar value (cap weight); b) the correlation between the S&P 500 and the rest of the market has been about 0.88... between the S&P 500 and small-caps specifically 0.85. So, 80% of your total stock market fund is actually in the S&P 500 to begin with, and, conceptually, the other 20% is in something which is 85% like the S&P 500 and only 15% different from the S&P... so, the part that's really different from the S&P is only 15% of 20% = 3%. It's as if you had 97% S&P and 3% something really uncorrelated.

Now, the small-cap thing. This is an area of controversy in this forum: how important, useful is it to have a "small-cap tilt" or a "small value tilt?" If you look at lazy portfolios of very small numbers of funds, like the three-fund portfolio advocated by Taylor Larimore, they use a total stock market fund.

In 1981 a researcher, Rolf Banz, put forward a flawed paper that seemed to show huge benefits from including small-caps. Then in 1992, Eugene Fama and Kenneth French published a paper that interpreted most of stock behavior in terms of three factors: the market factor (i.e. all stocks behave rather similarly), the size factor (small-caps), and the value factor. This is where the Morningstar "style boxes" come from, and it has led to portfolio strategies that advocate overweighting or tilting toward the small and value factors. There are many simple portfolios of, let's say, ten or fewer index funds or ETFs, that incorporate these ideas. The Bill Schultheis "Coffeehouse Portfolio" is an example. It uses 40% Total Bond for the bond portion, and splits the stock portion equally into six slices: large-cap blend, large-cap value, small-cap blend, small-cap value, international, and REIT.

In this forum we often argue about whether there's really a gain from doing this; how big the gain is likely to be; how certain we are of actually seeing a gain in our lifetime; how much danger there is that a tilted portfolio will hit a spell of underperformance so long that we'll throw in the towel.

I'm on the "total market" side myself but you'll have to decide for yourself, it's your money. I would, however, point out that Vanguard's humongous "all-in-one" funds, specifically the Target Retirement and LifeStrategy series, do not use any tilts--they probably meet the definition of a "lazy portfolio." I would also point out that people who advocate factor-based investing seem to have moved on to insisting that small and value are not enough, you really need to make use of other factors, momentum, quality, "low-vol" and what have you. In part this is because the importance of the size factor seems to have been greatly overstated in the past, and the value factor has been "missing in action" for about a decade.
Last edited by nisiprius on Mon Dec 11, 2017 10:29 am, edited 1 time in total.
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dbr
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Re: VTI-Is this truly the total us stock market?

Post by dbr »

I do not consider any of the "lazy" portfolios to be well regarded as they are cooking school recipe books instead of a serious efforts at a good asset allocation. But whatever you think about that, don't confuse recommendations to tilt to asset classes or follow a factor investing approach with holding the total US stock market.

For further explication see the excellent discussion by nisiprius above.
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