The geopolitical conflict unfolding in the Middle East has upended the global energy market. It has also increased investor concerns about economic growth, with Wall Street clearly wondering if high oil and natural gas prices could tip the world into a global recession. Stocks have pulled back, with Vanguard Total Stock Market ETF (NYSEMKT: VTI) down roughly 6% from its 52-week high. What should investors make of that drop?
To set a baseline, Vanguard Total Stock Market ETF provides the broadest possible exposure to U.S. stocks. It effectively owns all of the investable stocks traded on U.S. exchanges. That said, it uses a market-cap-weighted methodology, so the largest companies have the greatest impact on the exchange-traded fund’s (ETF’s) performance. That’s how the real world works, but it also has broader implications.
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For example, the top 10 holdings of Vanguard Total Stock Market ETF are exactly the same as the top 10 holdings of Vanguard S&P 500 ETF (NYSEMKT: VOO). The S&P 500 index is a curated list of economically important companies used as a gauge of market performance. The two ETFs actually perform very similarly over time.
However, it is notable that Vanguard S&P 500 ETF’s technology exposure is roughly 33% of assets, while Vanguard Total Stock Market ETF’s exposure is just over 36%. Adding an extra 3,000 or so stocks does lead to some minor differences. The biggest difference is Vanguard Total Stock Market ETF’s exposure to smaller and mid-cap stocks. That exposure, however, because of the market-cap-weighted approach, isn’t as large as you may expect. Large-cap and mega-cap stocks make up roughly 70% of the portfolio, with medium-cap stocks at roughly 20% and small- and micro-cap stocks rounding out the portfolio.
The big takeaway so far is that Vanguard Total Stock Market ETF is only slightly different from the S&P 500 index. Both indexes are still trading near all-time highs, despite the recent market pullback. In fact, Vanguard Total Stock Market ETF is still up around 16% over the past year.
That means the drawdown in price has left it only 6% below its 52-week high and 6% below its all-time high. Vanguard Total Stock Market ETF’s average price-to-earnings ratio remains fairly lofty at 26.9x, just shy of the S&P 500’s 27.6x. Vanguard Total Stock Market ETF’s price-to-book ratio is also on the high side, at 4.6x, just a touch below the S&P 500’s 5.1x.
