VTI ETF: Likely To Underperform In An Inflationary Environment

No one approach to investing fits for all people. Individuals often adjust their goals at different times in their lives, and there are various ways that capital can be allocated. Market conditions obviously also change as well, and investors often have to adjust their strategies at different times.

One of the more successful investing strategies over the last decade has been to focus primarily on growth, and more aggressive Exchange Traded Funds such as the Vanguard Total Stock Market ETF (NYSEARCA:VTI) that focus on more cyclical sectors have outperformed most of the broader indexes during this time period.

This Vanguard fund is up 163% over the last decade, and this ETF has returned an impressive 16.2% per year to investors during the timeframe. The main reason this investment has done so well since 2014 is because of VTI’s overweight position in growth sectors such as technology, industrials, consumer cyclicals, and the financials.

The Vanguard Total Stock Market Fund has 23.11% of the fund’s holdings in technology stocks, 14.62% of its assets in health care stocks, 14.04% of the fund’s holding in financials, 10.54% of the fund’s assets in consumer cyclicals, 9.84% in the industrial sector, 7.19% in communication, 6.53% in consumer defensive stocks, 4.95% in energy stocks, 3.62% in the real estate sector, 2.83% in utilities, and 2.72% in basic material stocks.

This fund has $282.03 billion in assets under management, the expense ratio is .03%, and the yield is 1.55%. The 4 largest holdings of this fund are Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG). This Vanguard ETF also holds 1.02% of the fund’s assets in cash and cash equivalents. VTI seeks to track the CRSP U.S. Total Market index, which includes large, medium, and smaller cap companies.

The main reason this fund has outperformed most of its peers and the broader indexes over the last decade is because of this Vanguard ETF’s overweight position in large cap technology and financial companies. VTI has nearly 37% of the fund’s assets invested in these 2 sectors, and large cap companies that this fund holds, such as Apple, Amazon, J.P. Morgan, and Bank of America, have performed very well over the last decade. VTI’s significant exposure to other cyclical industries has helped this fund outperform as well. The Vanguard Total Stock Market Fund has nearly 20% of the fund’s assets invested in the consumer cyclical and industrial sectors.

Aggressive investors who want to take risks will likely find this fund appealing because of this ETF’s focus on cyclical companies and growth stocks. This Vanguard fund has very minimal exposure to stocks that aren’t cyclical or growth focused. VTI has just 24% of the fund’s assets allocated overall to the utilities, communication, and health care sectors combined. The fund is also underweight the consumer defensive sector, with only 6.53% of this ETF’s assets in these less cyclical companies.

Value and income investors will likely not find this fund appealing for multiple reasons. This fund has minimal exposure to stocks that pay higher dividends, since the focus of this Vanguard ETF is on growth. The current yield of this fund is just 1.55%, and this exchange traded fund’s 5-year dividend growth rate of just 6.32% is significantly below average compared to more income and dividend focused funds such as the Vanguard High Dividend Yield Fund (VYM) iShares Select Dividend ETF (DVY) and the iShares Core Dividend Growth Fund (DGRO).

This fund is also likely to underperform most of the broader indexes and offer minimal income moving forward in the current inflationary environment we are in since this Vanguard ETF has minimal holdings in the energy and commodity sectors. VTI has just 7% of its capital allocated to the energy and commodity sectors, and the fund also has significant exposure to currency moves since this ETF is invested primarily in large cap companies.

As inflation levels rates have accelerated significantly since early 2021, interest rates have risen and the dollar has moved up as well, that has hurt this fund. A 10% move in the dollar higher against the Euro and other major currencies takes 4% in earnings out of the S&P 500 (SPY), and S&P 500 earnings are only supposed to grow around 2-4% his year.

The dollar has pulled back recently, but the US economy remains the strongest in the world, the dollar is likely to remains strong against most other currencies. Many leading analysts are forecasting earnings growth of just 2-4% for the S&P 500 as well. With rates continuing to move up, the dollar likely to remain strong against most major currencies, and prices remaining high, growth funds such as the Vanguard Total Stock Market Fund are likely to underperform moving forward.