Index fund investing and the benefits it provides are well known. Knowing which fund to pick and which to avoid is a whole process of analysis and research. The critical point to remember for this discussion is that there is no point in holding similar funds that cover the same area of the stock market, mainly when there are so many other options to pick from.
The Vanguard Total Stock (VTI) is a superb single fund investment option for investors looking to build and hold a simple and successful portfolio of funds. It’s the textbook recommended passive investment fund to have in a portfolio.
The Vanguard S&P 500 is a fund that is an alternative for investors that are already exposed to small and medium cap stocks or want to avoid them due to personal preference. It is also preferred in cases where investors want to have greater control over their portfolio mix.
Key Takeaways
- VTI links the CRSP US Total Market Index, while VOO links the S&P 500 Index. VTI is based on small, mid, and large-cap stocks. VOO is based on large-cap stocks only. Specifically, VOO comprises roughly 82% of VTI by weight.
- Both VTI and VOO are good additions to a portfolio, with very similar returns. VTI has approximately 80% holdings in large-cap stocks giving it 80% similarity with VOO holdings.
- VTI can be slightly more tax-efficient but is marginally riskier during market downturns.
- ESG scores place VTI slightly better than VOO on portfolio quality, sustainability, and corporate practices.
VTI vs. VOO: Summary
The Vanguard Total Stock Market Index ETF (VTI) and Vanguard S&P 500 Index ETF (VOO) are ETFs managed by Vanguard. Both are somewhat identical in terms of management fees, investment returns, and key performance metrics over the long term.
The high degree of correlation between the two funds is offset by their difference in holding structure and the indexes they work with. If we ignore their exposure ranges, the difference in returns and overall performance is negligible enough to make both funds each other’s alternates.
VTI has a slight edge over VOO due to slightly better performance, more diversity, tax efficiency, and dividend returns. As a new investor, having the VTI in your portfolio gives you rounded exposure to the Total Market with little expense. If exposure to large caps is an investment strategy, then opting for the VOO would make more sense. It’s a simple tradeoff between diversity and passivity. But even then, the loss is negligible in deciding between these two funds.
VTI vs. VOO: Composition
The Vanguard Total Stock Market Index ETF (VTI) and Vanguard S&P 500 Index ETF (VOO) will yield broadly similar returns in the long term for investors. There’s a solid basis for this reasoning. Both these ETFs and their linked indexes are weighted according to market cap. Having weighted averages means that companies with the largest market cap have a higher impact on the index price.
VTI (covering the total US stock market) holds about 76-82 % of S&P 500 stocks at any time. This means that out of its roughly 4000 holdings, about 80% are in large caps. On the other hand, VOO has just large caps and holds about 500 stocks on average. This similar holding structure makes the returns of both ETFs roughly similar over the long run.
The only thing that differs between them is that VTI also has some small- and mid-cap stocks. These small- and mid-cap stocks are more in number but make up only 20% (on average) of the total stock market because of their lower market cap. This 20% makes up about 3 000 stocks of smaller companies.
In turbulent times, VTI yields vary from VOO because of the differing behavior of small and mid-cap firms. Since smaller companies are more volatile, VTI varies to a greater degree than VOO does in the short term.
VOO is priced higher than the VTI, reinforcing the belief of many investors that marge market cap stocks are generally overpriced, and their higher weighting enhances this issue. Opposing views state that higher weights are good because the large-cap stocks perform better and yield better results.
In long-term investing, the difference in performance is not very significant between the two funds. As a personal choice, I would pick VTI because of the better spread across all categories that it would give me, provided it doesn’t overlap my existing portfolio.
VTI vs. VOO: Historical Performance
VTI offers wide based exposure to the U.S. stock market and tracks all market segments, from small to large caps. It was established in 2001 and tracked the CRSP US Total Market Index. The widespread target stocks of the ETF mean that it holds approximately 3500 stocks at any given time. In general, the distribution of stocks is 80 % large-cap stocks, 12-14 % mid-cap, and 6 % small-cap stocks.
VOO was established in 2010 to track the S&P 500 Index and has remained one of the more popular ETFs in the large-cap segment. It is popularly seen as an accurate reflector of the US stock market and investor sentiments about economic measures. It has approximately 500 stocks in its holdings.
This distribution and how funds are composed means that VOO is already a part of VTI’s holdings. The two funds have almost similar performance over the long term, as seen in the chart above. VTI is expected to outperform VOO slightly since small and mid-cap firms have higher returns due to their higher risk associations.
Along with better performance, VTI also has higher volatility, as shown by its standard deviation of 13.82 % compared to 13.30 % for VOO. The Sharpe ratio, which shows risk-adjusted returns, is slightly lower for VTI at 1.07 than 1.11 for VOO.
Coming to trailing returns, the three-month difference in total returns is significant, with VTI at -0.03 %, while VOO is at 0.55%. The total returns for the year are 32% for VTI and 30 % for VOO. Annualized returns for 3, 5, and 10 years are slightly higher for VTI. However, this is a nominally higher percentage ranging from 0.03 % to 0.07 %.
Both the charts show nominal differences in returns and performance. There would be very little to regret if you chose one over the other to invest in over the long term. Both funds are low-cost funds and run by Vanguard under similar pricing structures.
VTI vs. VOO: Fees & Tax Efficiency
Fees for both the funds are Vanguard’s standard 0.03 %. There are no minimum purchase requirements for either of the funds. Assets under management for VTI are around $ 1,350 bn, while VOO has approximately $ 830 Bn.
The exact impact would depend on your income bracket and investment account type regarding taxes. VTI has a marginally lower Qualified Dividend Income (QDI) than VOO. In 2020, the QDI for VTI was 96 %, for VOO, it was 100 %. VTI is historically tax-friendly because it is not restricted by the S & P 500 vetting process.
QDI is the percent of dividends charged at a lower tax rate than regular income. This means that funds with QDI are more tax-efficient than funds that don’t have qualified dividends. These are known as nonqualified dividends and qualified business income (QBI). QBI can be charged as much as 80% at max.
For instance, if you are in a 22 % tax tier, you will pay 15 % tax on QDI and 17.6 % on nonqualified QBI. The difference is just 2.6 %, but it can add up to a significant amount for large investments. It can also add up to a sizable amount when we factor in reinvested dividends and their compounding.
VTI vs. VOO: ESG Ratings & Impact
ESG ratings are increasingly significant for wealth and asset managers. ESG ratings play an important role in creating better transparency in investment decisions. A significant portion of investors is increasingly interested to know their investment choices’ ESG records. Knowing their portfolio companies’ environmental, social, and governance behavior is a smart move to assess long-term issues and behavior.
VTI
- 23% of VTI’s holdings scored an MSCI ESG Rating of AAA or AA, which is the top rating for ESG. 6% holdings scored a rating of B or CCC, which falls in the Laggards range for ESG.
- VTI falls in the 27th percentile in its US peer group. It ranks in the 44th percentile in the world with approximately 34,000 funds.
- Its holdings rate as moderately carbon-intensive. This is scored on the weighted average of carbon emanation per USD million sales.
- Approximately 6 % of the fund’s revenue from its holdings is green; either alternative energy and 0 % of is from sources like thermal coal (considered fossils fuels).
- The weighted average percentage of independent BOD is 81.3%, while the weighted average percentage of women on boards is 32.0%.
VOO
- VOO falls in the 47th percentile in its Equity US peer group. It ranked in the 50th percentile in the world amongst 34,000 funds.
- 27% of its holdings scored an MSCI ESG Rating of AAA or AA, qualifying as ESG top rating. 4% of VOO fund holdings got an MSCI ESG Rating of B or CCC, which falls in the laggards range for ESG.
- The holdings rank as moderate carbon-intensive scored on the weighted average of carbon emissions for USD million sales.
- 6.6% of the fund revenue from the fund’s holdings is green (from sustainable energy), and 0 % of revenue is from sources like thermal coal (considered fossils fuels).
- The fund’s weighted average percentage of independent BOD is 82.1%, and the weighted average percentage of women on boards is 32.8%
Overall, VTI scores slightly better on the ESG rankings, while VOO lags slightly behind.
Final Verdict
What should be evident by now is that both VTI and VOO are almost 80% identical. Just in case you don’t remember, this 80 % is the portfolio holdings of VTI in large-cap stocks. Both funds have almost corresponding returns, yields, and expenses. The only difference is in their prices. For today (December 2, 2021), VOO is trading for $ 420, while VTI is trading for $ 233.
Price aside, the main factor behind picking VTI or VOO should base on what your portfolio is at present. If you are already exposed to small and mid-cap firms, then VTI would cause sector overlap in your portfolio, making VOO the better choice. For investors looking to get exposure in the overall stock market over the long term, VTI would make sense in terms of price, as well as returns.
However, VTI will be marginally more vulnerable to market dips because of the small and mid-cap exposures. This can be managed by using the two ETFs as backups to cover losses. In case of market crashes (to which VTI will be more vulnerable), you can cut losses in VTI and switch your investment to VOO to offset losses and remain invested in a similar portfolio.
For initial investors just building their portfolio and planning to invest passively, VTI is a better option simply because of the overall exposure it gives to the total stock, all 3500 of them.
For investors the critical point here is that both options are great for the long term. While holding them, both doesn’t make sense. Either of the two would be a good decision. Investing doesn’t have a right or wrong combination or selection. Many investors make good choices go bad with poor timing or wrong decisions at crunch times. Many other luckier ones make bad decisions work for them by making better decisions at the correct time.