Why This ETF Is My No. 1 Recommendation for New Investors

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When a new investor asks me what stocks or funds they should buy, I usually tell them that I need more information. I wouldn’t recommend a chainsaw when a pair of scissors will get the job done, and I wouldn’t recommend an aggressive stock position when a simple index fund is more appropriate.

But for someone who is looking to invest for a long-term goal, I most frequently recommend one specific exchange-traded fund: the Vanguard Total Stock Market ETF (VTI -0.16%)

Easy to understand and cheap to own

The Vanguard Total Stock Market ETF invests in about 4,000 domestic stocks, aiming to track the returns of, essentially, the entire U.S. market.

That’s simple, and simple is good, particularly for novice investors. If you try to outsmart the market before you know anything about investing, you’re much more likely to outsmart yourself.

The ETF has an expense ratio of just 0.03%. That’s the percentage of investors’ assets the fund takes each year in order to pay for its overhead. For every $1,000 invested in it, you’ll pay just $0.30 a year. You probably won’t even notice it.

That ultra-low expense ratio compares favorably to what actively-managed mutual funds — and even many other broad-based index funds — charge.

Limited taxes and less fear

Holders of the Vanguard Total Stock Market ETF are unlikely to see any capital gains distributions. Since the index is relatively stable and the fund is extremely liquid, the fund managers are able to manage neutral capital gains on the holdings inside of the fund.

That means investors won’t owe much tax on the holdings. The fund pays a small dividend, which mostly consists of qualified dividends, so investors’ tax burdens from the ETF will remain low.

Also, it can be hard for new investors to judge in advance how well they’ll make decisions in the face of market volatility. Filling out risk tolerance questionnaires only takes you so far. But when Wall Street starts getting frenetic, you’re going to find out just how much you can stomach.

The Vanguard Total Stock Market ETF doesn’t take volatility out of the equation — but you can at least know that your investments in it are at no greater risk than the total stock market. That can help inform your future investment decisions and asset allocation strategy.

Getting more advanced

The Vanguard Total Stock Market ETF can be held in a portfolio indefinitely. It can also be used as a tool for more advanced strategies once you’re a more experienced investor.

For example, it’s a good candidate for tax-loss harvesting. You could sell shares of that fund, then quickly buy into a substitute fund like the Vanguard S&P 500 ETF or the Schwab US Broad Market ETF. Those two funds invest in very similar portfolios to the VTI, but they are different enough to avoid the wash-sale rule.

VTI could also play the role of a large-cap domestic stock fund in your portfolio, as the vast majority of its holdings are in large-cap stocks since it’s weighted by market cap. And you can easily add diversification by picking up shares of other ETFs with more narrowly focused holdings, even if they have some overlap with the stocks in the tail end of VTI’s portfolio.

It’s hard to go wrong

The Vanguard Total Stock Market ETF is a good choice for most long-term buy-and-hold investors. But if your timeline is shorter than that, it might not be your best option, and you’ll need to do some additional research. After all, personal finance is personal.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.