VOO vs VTSAX: the Better Investment Choice

When it comes to long-term investing, selecting the right fund is crucial for achieving financial goals.

VOO vs VTSAX: Two popular funds that investors often consider are the Vanguard S&P 500 Index ETF (VOO) and the Vanguard Total Stock Market Index Fund (VTSAX).

While both funds offer low-cost investment options with a focus on broad market exposure, there are differences that may make one more suitable for specific investment objectives.

Key Takeaways

• VOO offers targeted exposure to the S&P 500 Index, while VTSAX encompasses the entire U.S. stock market.
• VTSAX has a slightly higher expense ratio than VOO, but both funds are generally low-cost investment options.
• Diversification and sector allocation may vary between the two funds, impacting long-term performance and risk.

Overview of VOO and VTSAX

VOO is an exchange-traded fund (ETF) that tracks the S&P 500 Index, providing investors with exposure to 500 of the largest U.S. companies. In contrast, VTSAX is a mutual fund that aims to replicate the performance of the CRSP U.S.

Total Market Index, giving investors exposure to the entire U.S. stock market, including large-, mid-, small-, and micro-capitalization stocks. These differences in fund composition can have an impact on performance, fees, and investment strategy.

VOO and VTSAX are two popular investment options offered by Vanguard, a well-known provider of low-cost index funds and ETFs.

VOO is an exchange-traded fund (ETF) that aims to track the performance of the S&P 500, while VTSAX is the largest US-based mutual fund that seeks to mirror the returns of the total stock market.

Both funds provide exposure to a diverse array of US equities, with each having its unique characteristics and benefits for investors.

VOO, the Vanguard S&P 500 ETF, is a passively managed fund that replicates the performance of the benchmark S&P 500 Index.

By investing in this ETF, investors gain exposure to the 500 largest publicly traded companies in the United States.

As a result, VOO is heavily weighted towards large-cap stocks, primarily from the technology and communication services sectors.

This concentration offers higher growth potential but may also entail greater volatility. The expense ratio for VOO is 0.03%, making it a cost-effective option for investors seeking to track the performance of the S&P 500.

On the other hand, VTSAX, the Vanguard Total Stock Market Index Fund, is a mutual fund providing broader exposure to the entire US stock market. It covers not only large-cap stocks but also mid-cap and small-cap companies.

The fund invests in more than 3,500 stocks across various industries, offering investors a more diversified investment portfolio.

VTSAX has a slightly higher expense ratio compared to VOO, standing at 0.04%, which is still considered very low.

By investing in VTSAX, investors can gain exposure to the entire stock market, making it an attractive option for those seeking comprehensive diversification.

Though VOO and VTSAX differ in terms of their investment objectives and the range of companies they cover, their total returns have been nearly identical.

Investors should consider their personal investment goals, risk tolerance, and preferences between ETFs and mutual funds when choosing between these two options.

Both funds have proven to be solid choices for long-term investors looking for reliable and low-cost investments in the US equity market.

Investment Objectives

When comparing the investment objectives of VOO and VTSAX, both funds aim to provide investors with exposure to the U.S. equity market but with different focuses.

VOO, the Vanguard S&P 500 Index ETF, primarily targets large-cap stocks by tracking the performance of the S&P 500 Index.

On the other hand, VTSAX, the Vanguard Total Stock Market Index Fund Admiral Shares, offers more extensive diversification, encompassing large-cap, mid-cap, and small-cap stocks.

Investors seeking a broad representation of the U.S. equity market with greater exposure to various company sizes may opt for VTSAX.

This fund grants investors access to a wider range of market capitalizations and sectors. Due to its expansive coverage, VTSAX is more closely aligned with the U.S. stock market’s overall performance.

VOO, with its focus on S&P 500 companies, targets those who are specifically interested in the performance of large-cap stocks.

These companies are generally considered more stable and established, thus appealing to investors who prioritize a lower level of risk. Additionally, the S&P 500 index consists of companies with strong historical performance, potentially offering attractive returns.

In terms of expense ratios, VTSAX has a slightly higher expense ratio of 0.04%, while VOO offers an even lower expense ratio of 0.03% due to lower administrative costs associated with ETFs compared to mutual funds. This difference may be a consideration for cost-conscious investors (source).

Fund Composition

The Vanguard S&P 500 ETF (VOO) and the Vanguard Total Stock Market Index Fund (VTSAX) are popular investment options for those seeking passive, low-cost exposure to the U.S. stock market. These two funds differ in terms of their underlying indexes and the composition of their holdings.

VOO is an exchange-traded fund (ETF) that tracks the S&P 500 Index, which consists of approximately 500 large-cap stocks representing a broad range of sectors in the U.S. equity market. The S&P 500 Index is a market-cap-weighted index, meaning that larger companies carry more weight in the index.

This leads to a heavier concentration of large-cap stocks within the fund. The S&P 500 is widely regarded as a proxy for the overall U.S. stock market, and investing in VOO provides investors with exposure to some of the largest and most established companies in the country. The expense ratio for VOO is 0.03%.

On the other hand, VTSAX is a mutual fund that seeks to track the CRSP US Total Market Index, which includes virtually every publicly traded U.S. stock. This means that VTSAX offers exposure to a more diverse portfolio, including large-cap, mid-cap, small-cap, and micro-cap stocks. It represents the entire U.S. stock market, and not just the largest 500 companies. The expense ratio for VTSAX is slightly higher than VOO at 0.04%.

As a result of their respective underlying indexes, VOO is more heavily concentrated in large-cap stocks. In contrast, VTSAX provides exposure to a wider range of stocks across different market capitalizations and sectors.

For example, 84% of VOO is composed of large-cap stocks, compared to 73% for VTSAX.

This means that VTSAX is less susceptible to market fluctuations and the performances of specific sectors, whereas VOO may be more impacted by swings in the largest companies’ stock prices.

Performance Comparison

When comparing the performance of VOO and VTSAX, several factors need to be considered, including annual returns, risk-adjusted returns, Sharpe ratios, volatility, and drawdowns.

VOO, a passively managed ETF tracking the S&P 500, typically has a slightly higher dividend yield compared to VTSAX, with 1.50% and 1.48% trailing twelve-month yields, respectively. In terms of expense ratios, VOO holds a slight edge with a 0.03% ratio compared to VTSAX’s 0.04%.

Both funds have shown strong long-term performance, with VTSAX representing the entire U.S. market, including small- and mid-cap stocks, and VOO focusing on the S&P 500 index, which is mainly composed of large-cap stocks. As a result, VTSAX offers more diversification, while VOO provides exposure to relatively stable, well-established companies.

In terms of annual returns, VTSAX has a slightly higher average return over the past ten years compared to VOO. However, VOO’s return profile may have a slightly lower level of volatility, due to its focus on large-cap stocks with a long history of stability.

The Sharpe ratios of both funds can be used to analyze their risk-adjusted returns. Over the long run, VTSAX may have a slightly higher Sharpe ratio, indicating that it offers better risk-adjusted returns than VOO. However, both funds have relatively high Sharpe ratios compared to other investment options, indicating their attractiveness as long-term investments.

Volatility is another important criterion for evaluating funds, with lower volatility generally being desirable for investors seeking stable returns. As mentioned earlier, VOO may have slightly lower volatility due to its focus on large-cap stocks, while VTSAX has exposure to small- and mid-cap stocks, leading to a broader risk profile.

Finally, drawdowns refer to the decline in an investment’s value from its peak to its trough. While both VOO and VTSAX have experienced drawdowns during market downturns, their long-term performance indicates a strong ability to recover from such events.

Fees and Expenses

When comparing VOO and VTSAX, it’s essential to consider the fees and expenses associated with each fund.

Both VOO and VTSAX are low-cost investment options offered by Vanguard. However, there are some differences in their expense ratios and turnover rates that investors should be aware of.

The expense ratio for VOO, an ETF that tracks the S&P 500, is very low at 0.03%. This means that for every $10,000 invested in VOO, investors can expect to pay $3 annually in fees.

On the other hand, the expense ratio for VTSAX, a mutual fund that covers the entire U.S. stock market, is slightly higher at 0.04%. For every $10,000 invested in VTSAX, investors would pay $4 in fees annually. While the difference is minimal, it may accumulate over time, especially for large investments.

Another crucial aspect to examine when comparing VOO and VTSAX is their turnover rate. The turnover rate represents the percentage of a fund’s holdings that are bought and sold within a given year. A lower turnover rate can indicate lower trading activity within the fund, which can lead to fewer taxable events for investors and potentially lower costs.

The turnover rate for VOO tends to be lower, around 4%, as it focuses on the more stable S&P 500 index. This indicates that fewer holdings are bought and sold within the fund each year.

In contrast, VTSAX has a higher turnover rate at approximately 8%, given its broader market exposure. The increased turnover rate for VTSAX might lead to higher transaction costs and more taxable events for investors.

Minimum Investment and Liquidity

When considering an investment in VOO or VTSAX, it’s essential to review their minimum investment requirements and liquidity.

Both Vanguard S&P 500 Index ETF (VOO) and Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) offer excellent investment opportunities. However, they differ in structure and investment requirements.

The Vanguard S&P 500 Index ETF (VOO) is an exchange-traded fund (ETF) and can be bought and sold throughout the trading day like any stock. This feature provides flexibility and liquidity to investors. There is no minimum investment requirement for buying VOO shares, meaning investors can buy as little as one share.

On the other hand, the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is a mutual fund that has a minimum initial investment requirement. To invest in VTSAX, investors must meet a $3,000 minimum investment.

Unlike ETFs, mutual funds can only be bought and sold at the end of the trading day at the net asset value (NAV) price. This difference in structure affects liquidity as VTSAX shares cannot be traded throughout the day.

VOO and VTSAX also differ in expense ratios, which can impact long-term returns. VOO’s expense ratio is 0.03% while VTSAX’s expense ratio is slightly higher at 0.04%. While this difference may seem small, it can compound over time, potentially affecting an investor’s total gains.

Portfolio Diversification

When comparing VOO and VTSAX, one of the key factors to consider is portfolio diversification. Diversification is the process of spreading investments across a wide array of assets to minimize risks and optimize potential returns.

An investor must carefully evaluate the holdings, net assets, and the top holdings of each fund to gauge the level of diversification they provide.

VOO is a passively managed ETF that tracks the S&P 500 index, which includes around 500 of the largest US stocks. These are primarily large-cap stocks, offering exposure to well-established companies.

With $734 billion in assets under management (AUM), VOO has a significant amount of capital invested in these companies. The top 10 holdings of VOO, which include mega-caps like Apple and Microsoft, make up approximately 27% of the fund’s total net assets (source).

On the other hand, VTSAX is a mutual fund that aims to match the performance of the CRSP US Total Market Index. This index covers the entire US stock market, encompassing large-cap, mid-cap, and small-cap companies.

As a result, VTSAX holds more than 3,600 individual stocks, providing investors with a far more diverse array of investment options. Its assets under management are around $1.32 trillion, making it the largest US-based mutual fund (source). The top 10 holdings of VTSAX, which also include companies like Apple and Microsoft, account for about 21% of the fund’s total net assets.

Sector Allocation

When comparing VOO and VTSAX, it is essential to examine the sector allocation of both funds. This helps investors understand how the funds are diversified across various industries.

VOO tracks the S&P 500 index, making its sector allocation reflective of the composition within that index. Some of the largest sectors in VOO include technology, healthcare, financials, and industrials. Other sectors represented include real estate, communication services, consumer discretionary, basic materials, energy, and utilities.

VTSAX, on the other hand, covers the extended market as the largest US-based mutual fund. Its sector allocation is slightly different than VOO because it aims to represent the entire US stock market. Technology and healthcare dominate VTSAX as well, but the composition of other sectors, like financials, industrials, and consumer discretionary, may vary.

Here is a summary of each fund’s sector allocation:

While both VOO and VTSAX have significant exposure to technology, healthcare, and financials, investors should be aware that the weightings within each sector can slightly differ. This means that they may experience different performances during various market conditions.

For example, VOO tends to have a higher allocation towards large-cap stocks, whereas VTSAX has a more balanced exposure to mid and small-cap stocks in addition to large-cap companies. This can lead to VTSAX having a broader representation of the US stock market and a more diversified risk profile.

Dividends and Yields

When comparing VOO and VTSAX, it’s essential to evaluate their dividends and yields, as these are key metrics that help investors gauge the income generated from their investments. Although both funds have their advantages, their dividend yields and distributions might vary slightly.

VOO is an ETF that tracks the S&P 500 Index, typically providing exposure to large-cap US stocks. Due to its focus on dominant players in the market, VOO tends to have a stable dividend yield, commonly in the range of 1.5% to 2%.

This yield can provide investors with regular income, although the amounts may fluctuate based on market conditions and the performance of the underlying companies.

On the other hand, VTSAX is a mutual fund with exposure to the entire US stock market, including small and mid-cap companies. This diversification reduces the fund’s reliance on a specific sector and inherently affects its dividend distribution.

VTSAX has a similar dividend yield to VOO, usually varying between 1.5% and 2%, although it might be slightly more volatile due to the broader market exposure.

When considering which fund to invest in, one should compare the funds’ dividend yields and take note of the payout frequency.

Both VOO and VTSAX distribute dividends quarterly, which can be critical for investors looking for consistent income streams. However, it’s important to remember that dividend yields will inevitably fluctuate over time in response to changes in the stocks’ performance and market conditions.

Tax Efficiency

When comparing VOO and VTSAX, it’s essential to consider their tax efficiency. Tax efficiency refers to how well a fund is structured to minimize taxes for its investors. A tax-efficient fund will have lower capital gains distributions, which can help investors retain more of their earnings and reduce their tax burden.

The Vanguard S&P 500 Index ETF (VOO) is known for its tax efficiency due to its ETF structure. This structure allows VOO to avoid distributing most capital gains to its investors, which in turn results in a more tax-efficient investment.

Additionally, ETFs like VOO are typically more tax-efficient than mutual funds because they do not require frequent trading, reducing the chances of incurring capital gains.

On the other hand, the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is a mutual fund that, while still tax-efficient, may not match the tax efficiency of VOO. Mutual funds are more susceptible to capital gains distributions due to their structure and trading patterns.

However, it’s worth noting that VTSAX is still considered highly tax-efficient compared to other mutual funds, especially due to its low turnover rate and broad diversification.

Trading Platforms and Brokerage Options

When it comes to investing in VOO and VTSAX, a variety of trading platforms and brokerages are available for investors. These platforms offer access to both funds, catering to diverse investment goals and preferences.

M1 Finance is a popular option for investors interested in both VOO and VTSAX. This platform enables users to invest in fractional shares and avoid transaction fees. Their robust and user-friendly interface makes it easy for beginners and experienced investors alike to integrate VOO and VTSAX into their portfolios.

Another platform investors can try is Personal Capital. While primarily known for their wealth management services, Personal Capital also provides a brokerage platform. This platform gives investors access to an extensive range of investment opportunities, including VOO and VTSAX. They offer personalized advice and tracking tools, helping you create a tailored investment strategy.

Charles Schwab offers both VOO and VTSAX as investment options in their brokerage account. As one of the largest brokerage firms in the world, Schwab appeals to a wide range of investors, from beginners to high-rollers.

Their platform provides comprehensive research tools, educational resources, and relatively low fees. However, it’s essential to note that Schwab may charge transaction fees for certain trades and fund purchases.

Given the accessibility of VOO and VTSAX across various platforms, the choice largely depends on an investor’s individual needs and preferences. Factors such as fees, accessibility to fractional shares, and educational resources should be taken into account when choosing a suitable brokerage platform.

The Bottom Line: VOO vs VTSAX

In comparing the Vanguard S&P 500 Index ETF (VOO) and the Vanguard Total Stock Market Index fund (VTSAX), it is essential to consider the differences in their composition, expense ratios, and investment strategies.

VOO tracks the S&P 500 index, focusing on large-cap companies within the United States. On the other hand, VTSAX covers a broader range of companies by tracking the CRSP US Total Market Index. This distinction means VTSAX encompasses a more extensive and diverse portfolio, offering exposure to small and mid-cap stocks in addition to the large-cap stocks that VOO focuses on.

When it comes to expense ratios, there is a slight difference between the two funds. VOO has a lower expense ratio of 0.03%, giving it a slight advantage in terms of cost efficiency over VTSAX, which has an expense ratio of 0.04%.

Ultimately, the choice between VOO and VTSAX depends on an investor’s specific needs and goals. Those seeking to closely track the performance of large-cap companies and prioritize a lower expense ratio might find VOO more suitable.

However, investors wanting a broader market exposure that includes small and mid-cap stocks may prefer the more diversified approach of VTSAX.

As with any investment decision, individuals should carefully consider their own risk tolerance, investment timeframe, and portfolio strategy before choosing between these two funds.

Frequently Asked Questions