Why Vanguard US Total Market Shares Index ETF (VTS) is a top buy for retirement

Cash flow and capital growth are two reasons why I think this ASX ETF could be a really good pick for retirement.

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I'm a big fan of the Vanguard US Total Market Shares Index ETF (ASX: VTS) as a solid investment for building towards retirement — and for retirees too.

The VTS ETF is one of the largest exchange-traded funds (ETFs) on the ASX and provides investors with exposure to most of the US share market.

Pleasingly, its most significant portfolio holdings are among the world's biggest and strongest companies, including Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms and Berkshire Hathaway.

Another attractive feature of this ETF is that its management fee is just 0.03% per annum. This leaves almost all returns generated in the hands of investors, making it one of the cheapest annual fees in Australia.

Here are some more reasons why I think it's such an effective investment for people in both the accumulation and retirement phases.

Excellent wealth-growing pick

The VTS ETF owns a high-quality group of US tech businesses with globally leading service or product offerings. For example, companies like Microsoft, Nvidia, and Alphabet are leading the charge for the development of artificial intelligence (AI). These US giants have incredible balance sheets, impressive operating profit margins, and long growth runways.

Due to sizeable allocations to those high-performing stocks, the Vanguard US Total Market Shares Index ETF has delivered a hefty average annual return of 14.2% in the five years to April 2024.

Now, we can't fully rely upon this rate of return in the future, but even if it remains reasonably stable in the years ahead, investors can grow wealth at an impressive rate.

For example, if someone invested $1,000 a month for 20 years and the fund grew at 14.2% per annum, it would be worth $1.1 million after two decades.

This fund has more to it than the top holdings — it actually has 3,719 holdings. That's an enormous amount of diversification in a single investment.

I also like the sector allocation. Technology makes up around a third of the weighting, which is the industry where many compelling businesses are located. Other sectors in the ASX ETF with double-digit weightings include consumer discretionary (14.1%), industrials (13%), healthcare (11.8%), and financials (10.9%).

Can unlock cash flow for retirees

Investors in retirement are likely seeking income to fund their cash flow requirements.

The VTS ETF isn't known for dividends – it currently has a dividend yield of around 1.4% because of the generally low dividend yield of the underlying holdings.

However, the ETF can still be a great source of income by crystallising some capital gains. I'll show you how it can work.

Imagine owning $100,000 of the VTS ETF, and over 12 months, it rises 10% to become worth $110,000. If you sell $5,000, that's a 5% dividend yield on the original $100,000, and the net value after the sale would be $105,000.

Of course, the stock market can be volatile and shares in the VTS ETF might be lower in some years, so I wouldn't choose to sell all my gains every year. It's good to keep some in reserve in case you need an emergency fund. A 4% or 5% yield would be the right balance, in my opinion.

If the VTS ETF keeps delivering good returns, it could provide cash flow for retirees and capital growth.

Suzanne Frey, an executive at Alphabet, 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. 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. 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, and Nvidia. 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, Microsoft, and Nvidia. 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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