The total stock market is trading at a discount to its recent past, but the real question is whether the slim reward is worth the risk.
The basket of stocks inside the Vanguard Total Stock Market ETF (VTI) offers an earnings yield of 3.8%, while a 10-year U.S. Treasury offers 4.6%. That simple comparison is the starting point for the most important question you can ask before buying a single share: is the price you pay today justified by what is actually inside the fund?
A Price Tag From A Different Era
Let’s start with the price versus the fund’s own history. VTI currently trades at a trailing price-to-earnings ratio of 26.3. That number means little in isolation. But compared to its own past, it’s a significant departure. Over the last five years, the fund’s P/E has averaged 41.1. Today’s multiple is about 36% below that average. On price alone, you are paying less for each dollar of earnings than investors have become accustomed to in the recent past.
The Engine Under The Hood
A discount can be a warning sign or an opportunity. The question is whether the earnings are deteriorating. The data suggests they are not. The fund’s forward price-to-earnings ratio is about 19.6, a good deal lower than its trailing multiple. That gap reflects analyst expectations that the aggregate earnings of the fund’s holdings will grow about 13% over the coming year. This forecast is grounded in recent history: the fund’s largest holdings saw their earnings per share grow about 50% over the past year. And when we say “the fund,” we are really talking about a handful of giants. While VTI holds 3598 positions, its direction is largely set by names like Nvidia at 6.6% of the fund, Apple at 5.7%, and Microsoft at 4.4%. Their growth is, for all practical purposes, the fund’s growth.
The Price Of Patience Is Negative
Here is the strongest argument for thinking twice. The fund’s aggregate earnings yield is 3.8%. At the same time, the 10-year U.S. Treasury yields 4.6%. This means the compensation you receive for taking on the risk of owning thousands of stocks is currently less than what you can get risk-free. That’s a thin cushion. If the expected 13% earnings growth doesn’t arrive, there is little else in the math to support the price.
The Index Question: Own Everything, Or Just The Best?
So, is today’s price justified? The valuation, judged against its own history and the strong growth of its key holdings, appears reasonable. The current valuation presents a compelling mathematical case for long-term investors. The catch is the opportunity cost. You are accepting a negative risk premium relative to the 10-year U.S. Treasury, banking on future growth to make it worthwhile. For an owner, the decision comes down to this: buying an index fund like VTI means you own every company in it, at the price the market sets. The alternative is a more selective approach, screening for quality or a wider margin of safety. The one figure to watch is the forward P/E; if it starts to climb without a corresponding jump in earnings, it suggests the market’s optimism is getting ahead of reality.
A More Selective Way To Own The Same Idea
Walking through whether a fund’s price is justified by what is inside it is a question most index investors never get to ask at the holding level. An index fund like Vanguard Total Stock Market owns what its index tells it to own, at whatever price the index sets, whether or not each individual name would pass that test today. That is the trade-off of broad exposure: you get the market, and you also get whatever the market has decided to include.
The Trefis High Quality (HQ) Portfolio applies the same kind of rules-based discipline an index fund does, systematic selection and consistent re-balancing with no gut-feel stock picking, but at the level of 30 individually screened names rather than blind index inclusion. Same rigor, applied one layer deeper, with a track record of outpacing the S&P 500, S&P Mid-cap, and Russell 2000. For the part of a portfolio where price discipline matters most, that selectivity is the alternative to owning everything at any price.
