May 1st, 2008
Frugality in Practice: Buying the Entire Stock Market with an Exchange Traded Fund
I’ve talked about the virtues of passively managed low cost index funds and discount brokers until I’m blue in the face. Now let’s put some of that into practice: let’s figure out the cheapest way to buy the entire stock market!
It would be an absolute nightmare to try to buy stock in every company in that index, so don’t even consider that plan. It’s clear the best way for the small individual investor to get this level of diversification is by using some kind of fund. The Vanguard Total Stock Market Index (VTSMX) is a mutual fund that allows you to get the performance of the entire stock market for the low, low expense ratio of 0.15%, and if you buy into the fun directly from Vanguard, you have no trading cost.
Vanguard does have some minimums and account maintenance fees associated with their accounts that might make it difficult for beginning investors to buy into this fund there–for instance, VTSMX has a minimum investment of $3,000. Those with smaller amounts to invest may be better off with an Exchange Traded Fund. The Vanguard Total Stock Market ETF (VTI) is an ETF with an expense ratio that’s even lower: .07%. But because it’s an ETF, you avoid the VTSMX minimum of $3,000 to invest–which may be a barrier for beginning investors–and can buy a share (as of this writing) for $137.48. Add on a $6.95 trading fee from Firstrade.com (substitute the fee and name of your favorite discount brokerage here) and there you have it–the entire stock market in a single share, the cheapest way to get the performance of the entire stock market.
