The pros and cons of buying the Vanguard US Total Market Shares Index ETF (VTS)

There are both positives and negatives to this ETF.

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The Vanguard US Total Market Shares Index ETF (ASX: VTS) is one of the more popular exchange-traded fund (ETF), with around $4 billion invested in the fund.

As the name suggests, it invests in the US share market. Aussies might be interested in it as a way to add international exposure to their ASX portfolio.

Let's get into what investors might like — and not like — about the ASX ETF.

The positives about the VTS ETF

Vanguard US Total Market Shares Index ETF definitely ticks plenty of diversification boxes. It invests in more than 3,600 companies — an enormous amount of diversification. The portfolio is allocated across a spread of sectors but also gives more weight to growing businesses, including technology (31.9% of the portfolio), consumer discretionary (14%), industrials (12.9%), healthcare (12.2%) and financials (10.9%).

I'd recommend Aussies gain exposure to international shares because the ASX share market makes up only around 2% of the global share market. The other 98% includes plenty of winners.

And the VTS ETF is invested in a lot of winners. Many of the world's strongest and most exciting large businesses are listed in the US. I'm talking about names like Microsoft, Apple, Alphabet, Nvidia,, Meta Platforms (Facebook and Instagram), Berkshire Hathaway and Tesla.

Being invested in great businesses, and having sizeable exposure to them, has enabled the Vanguard US Total Market Shares Index ETF to deliver an average return per annum of 15.1% over the 10 years to January 2024.

Another useful aspect of many of these companies is that they generate earnings from across the world – so the profit seems to be very diversified.

The ETFs financial metrics are impressive for an index-based investment – Vanguard advised that, as at 31 January, the return on equity (ROE) was 24%, and the earnings growth rate was 15.6%.

Possible negatives

The underlying quality of the portfolio is strong, and the valuation metrics certainly reflect that.

At 31 January 2024, it had a price-to-book ratio of 3.9x and a price/earnings (P/E) ratio of 23. These figures are not necessarily high for an individual technology company, but they are when considering it's an ETF with more than 3,000 holdings.

The relatively high price has also flowed onto the passive income potential of the business. It has a low dividend yield of 1.4%, whereas other markets, such as Australia and the United Kingdom, typically offer much higher dividend yields.

The VTS ETF does miss out on a number of high-quality businesses listed in other regions, such as Europe and Asia, which is why the Vanguard MSCI Index International Shares ETF (ASX: VGS) might be a more useful choice for people wanting global diversification in a single investment.

Investors could decide to use the Vanguard All-World ex-US Shares Index ETF (ASX: VEU) to work with the VTS ETF to get that non-US diversification, if someone wanted that exposure.

Foolish takeaway

Vanguard US Total Market Shares Index ETF is a very effective ASX ETF, in my opinion.

Ultimately, I think this investment can perform well over the long term, though I wouldn't expect very strong returns in the short term because of how strongly the US market has already climbed over the past year.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Nvidia, and Vanguard Msci Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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