The Vanguard index funds are the gold standard in terms of investment options out there. But within the hundreds of funds that Vanguard offers, there are two specifically that stands out as the obvious choice for regular civilian investors like you and me.
And that is
- Vanguard S & P 500 ETF,
- Vanguard Total Stock Market Index Fund.
But the real question is which one is better?
In this blog post, we’re going to take a look at both of them to find out:
- what are the similarities?
- what are the differences?
- which one is better? and
- which one should you actually be using within something like your Roth IRA or taxable investment accounts?
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The ticker symbols for each of these ETFs are VTI for the Vanguard Total Stock Market Index Fund and VOO for the S & P 500 index fund.
These technically aren’t index funds, but they’re what I’ll call ETF index funds. These exact same ETFs with the exact same holdings are offered through Vanguard directly and are also known as Admiral Shares under the ticker symbols, VTSAX and VFIAX.
For these Admiral shares, we’ll refer to these as traditional index funds, aka TIF’s. Which begs the question, why in the world would you choose to use the ETF version as opposed to the Admiral Shares or traditional index fund version?
Basically because the Vanguard trading platform is essentially trash. And if you wanna buy the traditional index fund, then you have to use it. But with the ETF version, you can use any investment
platform to trade them on.
Like, of course, M1 Finance, which is my preferred investing platform. There’s also no minimum to invest in the ETF version either. With the traditional index fund, through the Vanguard investing platform, there’s a minimum of $3,000 before you can actually start investing into that fund.
But yeah, that’s basically the reason. As much as I love Vanguard’s investment options, I want you to be able to invest in their products on the specific platform that works best for you with no limitations.
- VTI and VOO are both similar in that they’re passively managed ETF, which makes them dirt cheap to own.
- VTI and VOO are also similar in that they’re both tracking a specific segment of the market, but that specific segment is different for each.
With the Vanguard S & P 500 ETF, the goal is to only invest in the companies that make up the S & P 500, which represents the 500 largest US companies
based on market cap.
How that market cap is calculated?
By tracking the number of outstanding shares and multiplying it by the price per share.
|Market Cap= Outstanding Shares x Price Per Share|
So if Roman’s Salad Company was a publicly traded company who had 1000 outstanding shares, and the current price per share was $5 per share. Then the market cap of
Roman’s Salad Company would be $5,000 because 1000 times $5 is $5,000.
As companies get removed and added to the S&P 500 the VOO ETF will automatically follow suit by adding and removing the same stocks. To make it simple, think of VOO as very picky.
They’re only betting on the most stable and well known companies within the US stock market. They’re not looking to be friends with that random hot stock that has been pumped up for the past three months that’ll eventually go down in value once the hype wears off a little bit.
On the other hand, the Vanguard Total Stock Market ETF takes a more open-minded approach to what it does.
What are the goals of VTI ETF?
The goal of the VTI ETF is to match the performance of the total stock market as a whole. Because of this, it’s going to hold those large cap companies like the ones that are a part of VOO, as well as mid and small cap companies.
As we know the stock market as a whole has only gone up over time.
So when you invest in VTI, you’re betting on the us stock market as a whole. We could technically say that with VOO, you we’re also betting on a large portion of the US stock market as a whole, because those 500 companies make up about 75% of it.
But with VTI, you’re capturing that additional 25% of the stock market. Think of VTI as being a lot more inclusive than VOO is, because it holds the smallest of the small companies that are a part of the US stock. market.
Yes, the percentage of those small companies that are held within VTI might be small as well, but more about that in a minute. Cost isn’t everything when it comes to an ETF, but it’s definitely something that you wanna pay attention to because it’s going to slowly eat away your returns over time.
Because VTI and VOO are passively managed ETF Index Funds, their expense ratio is extremely low at 0.03%. This is well below the industry standard from that perspective so VTI and VOO are extremely cost-effective. The fees don’t get any lower than that, except for the free ones offered through fidelity.
When it comes to the number of holdings, this is where the big difference is. VOO holds 508 different companies while VTI holds a little over 3,800 stocks. The holdings for VOO shouldn’t increase by much if any at all, but they will for VTI.
As time goes on, VTI will continue to increase as more publicly traded companies enter the US stock market because it’s trying to match the performance of the total stock market.
So by default, it’s forced to add those new companies. I remember just a year or two ago, it was only made up of a little over 3,600 companies. So this has the potential to change as we see more things like IPO’s and specs.
Both of these are on the rise so I could see VTI growing to say 4,000 different stocks within the next couple of years, when we look at the top 10 sectors held within VTI and VOO, we noticed something interesting.
|Total Top 10 Weighting||99.87%|
|Total Top 10 Weighting||99.29%|
The holdings from a percentage basis are pretty darn close. Now, most of them were only off by less than 1%. VTI holds about 2% less in tech, which isn’t very much of a difference. It’s basically like saying for every $100 invested, you’re putting $2 more into technology with VOO, as opposed to VTI where that
$2 would be spread among a lot of other sectors.
Take a look at the table above, even though VOO only holds 508 stocks, the weighting in regards to sectors is almost identical to the total US stock market. Which tells us that those 508 companies within VOO kind of naturally mimic what the total stock market is doing from a sector perspective.
Investing in VOO
Investing in VOO is kind of like saying, hey, I wanna match the returns of the stock market as a whole, but I wanna do it with the top 500 most stable companies traded on the stock market.
We wanna look at the top 10 breakdown of the stocks held within each ETF and how much of the overall fund it makes up, because that’s going to tell us what’s really going to make the price of each one, move the most.
With the Vanguard S & P 500 ETF, we see that the top 10 companies make up 27%of the holdings.
It’s like saying that for every $100 you invest into VOO, $27 of it is going to be put into these 10 companies.
|Facebook, Inc. Class A||2.28%|
|Alphabet, Inc. Class A||2.01%|
|Alphabet, Inc. Class C||1.96%|
|Berkshire Hathaway Inc. Class B||1.44%|
|JPMorgan Chase & Co.||1.29%|
|Total Top 10 Weighting||27.31%|
This is a big amount, but nothing to be concerned about because as you can see, these are the 10 largest
publicly traded companies. They are very stable right now and as time goes on, if any of them slip, then
they’ll move out of the top 10 and less of your money will be allocated towards them.
That’s the one thing that I love about these index funds. They are self cleansing and automatically take care of removing the losers and adding the winners whenever things change.
With the Vanguard total stock market ETF, we see that the top 10 companies are exactly the same, which tells us that it’s most likely going to be tracking pretty close to VOO where the big differences is the weighting towards the top 10.
It only makes up 22% or $22 of every $100 invested. This makes sense because VTI is forced to spread its overall weighting among almost 3,300 more companies.
So there’s less, that can be concentrated into those top 10 stocks. Looking at the breakdown from a cap perspective, VOO is of course going to be the majority of large cap because it’s naturally tracking the 500 largest publicly traded companies on the stock market.
VOO Benchmark Comparison Market Cap Size
Not a big shocker there. When it comes to VTI, we see it spread out a little bit more with 10% in mid cap, 2.5% in small cap and less than 1% is made up of micro cap stocks.
Because VTI is holding about 13% in stocks, outside of large cap, it’s
going to give you more exposure to those potential up and coming stocks that could be the future top 500 .
Tesla was added to the S & P 500 at the end of 2020. So if you invested in VOO leading up to that point, then you wouldn’t have profited from that insane rise during that time.
But if you were holding the Vanguard Total Stock Market ETF, then you would have been a part of the upside that Tesla saw in 2020, because the ETF holds a little bit of all stocks.
So then how does the performance compare between the two?
I first need to give a warning when it comes to looking at past performance to decide which one of these to invest in and anything you invest in for that matter, this should not 100% dictate how you invest your money.
It’s a good indicator of how things have done in the past, but it tells us nothing about where each of these will go in the future.
Yes, let’s be aware of this, but it’s one piece to the whole puzzle that helps us decide which one to invest in.
I first need to mention that VTI and VOO haven’t been around for the same amount of time in that VTI was created in 2001, and VOO was created in 2010.
But the good news is that the traditional index fund for each of them was created at the exact same time in the year 2000. And because the traditional index fund holds the exact same stocks at the exact same weighting as the ETF index fund, we can use the TIF to get an idea of how they compare
over the longest period of time possible.
More is better in that the more years worth of data that we have, the better we can understand how these things move through bull and bear markets.
For now, let’s compare the returns over the past 10 years
|1 Month – 2.89%||1 Month -1.93%|
|3 Months – 6.38%||3 Months – 5.27%|
|YTD – 17.48%||YTD – 16.30%|
|1 Year – 38.95%||1 Year – 41.48%|
|3 Years – 18.17%||3 Years – 17.92%|
|5 Years – 17.32%||5 Years – 17.38%|
|10 years – 15.12%||10 years – 14.92%|
As you can see, they’re both pretty darn close from year to year over the past 10 years.
The biggest difference at this point in time is the one year performance. VTI is outperformed by about 2.5%.
If you look at the graph and you’ll notice that around the November, December timeframe, VTI gets a little bump up in return. To understand why that might be, we have to look at what makes up VTI versus VOO.
Now VOO is made up of large cap only stocks, while VTI is made up of large, mid, small, and a few micro cap stocks as well. So the biggest driver in difference between the two would most likely come from those mid, small and micro-cap companies.
And if I pull up a graph comparing VTI and VOO, along with a mid, small and micro capic ETF, you can see what’s really happening here.
VOO is the very bottom, dark green line and VTI is the dark blue line right above it. You can see the color coding right there. VO is a mid cap ETF, VB is going to be a small cap ETF and IWC is a micro cap ETF.
Notice: How at the same time that VTIs return increased and pulled away from VOO and the roughly November, December timeframe.
So did those mid, small and micro cap companies, which tells us that right now within one year time period, VTI has outperformed VOO because mid, small and micro-cap stocks have performed well during that time. But if you were investing for the long term, so five plus years, then this one year performance is irrelevant, especially when we talk about reversion to the mean when it comes to stock returns.
What is Mean Reversion?
Mean Reversion, or reversion to the mean, is a theory used in Finance that suggests asset price volatility and historical returns eventually will revert to the long-run mean or average level of the entire dataset.
As time goes on, we’ll see these mid small and micro-cap companies slightly underperform where they have been over the past year. Which means that the return of a total stock market index fund will eventually align a little bit closer to an S & P 500 index fund.
To show you what I mean, let’s look at the 21 year track record of the traditional index fund for VTI and VOO, which are VTSAX and VFIAX.
|Since inception 11/13/2000|
Since inception, VFIAX or VOO has had a return after taxes and sales of 6.52% while VTSAX or VTI has had a return of 7.01%. A lot closer than that 2.5% difference that we’ve seen over the past one year.
So which one is better? VTI vs VOO
Which one should you actually invest in? To be honest with you, they’re both great and you can’t go wrong
with picking either one. If you want a little bit of exposure to those mid, small and micro-cap companies, while still playing it safe with a majority of your money then VTI is going to be the ETF for you.
If you are not interested in messing with any of those smaller companies and wanna stick with the heavy hitters in the stock market, that you know will keep you safe, then go with VOO.
And if you still don’t know, and you can’t decide, then put a little bit of money into each one every time you invest. Not investment advice, but I can tell you that I personally hold both of them within my overall money invested.
I do have more money put into an S & P 500 index fund like VOO, because my 401k through my employer is one of my larger accounts. And that employer, of course, doesn’t offer something equivalent to the Vanguard Total Stock Market Index Fund so I don’t really have a choice.
No matter what, I think that one of these two, if not a little bit of both should make up a decent portion of your overall invested money to set yourself up for retirement.
The more important thing is to just get your money invested as quickly as possible, no matter what the stock market is doing, because timing is everything and when you invest will determine your returns more than anything.
VOO has outperformed VTI in my public M1 Finance investment account. In my M1 Finance Roth IRA account, I hold VTI and I’ve had a 63% return. While in my M1 Finance future car investment fund, I hold VOO and the returns over there are sitting at almost 80%.
Not because I chose one over the other, but because of the date I invested in the each one every single month.
Now, unfortunately we can’t predict what the stock market is going to do on a day-to-day basis so we might as well hedge our bets by just getting the money invested and let the stock market gods handle the rest.
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