The popularity of index investing in passive funds has exploded, driven by their outperformance compared to actively managed ones.
According to the S&P Dow Jones Indices SPIVA report, over a 15-year period, a staggering 90-95% of actively managed funds underperformed their passive index benchmarks.
However, there are multiple fund providers and offerings in the index fund industry, but not all funds are equal. Vanguard is among the most prominent and respected participants in this field.
Renowned for its commitment to low-cost, diversified investment solutions, Vanguard has garnered the trust of millions of investors.
Vanguard’s assets under management (AUM) have experienced explosive growth, expanding over eight times since 2005 to reach USD 8.6 trillion, solidifying its position as a dominant force in the industry.
Vanguard offers two exceptionally popular exchange-traded funds (ETFs) providing exposure to the U.S. stock market:
This article discusses the critical differences between VOO and VTI to help you determine which ETF best suits your investment goals.
Overview of Vanguard ETFs
Vanguard is renowned for its extensive range of Exchange-Traded Funds (ETFs), offering investors low-cost access to diverse market segments. Among the many options, two standout ETFs are the Vanguard Total Stock Market (VTI) and Vanguard S&P 500 ETF (VOO).
These ETFs are popular among investors seeking broad exposure to the U.S. stock market, but they serve slightly different purposes and cater to varying investment strategies.
Understanding VTI and VOO
Vanguard ETFs are popular, low-cost investment funds that track various market indexes. They offer exposure to multiple assets, from broad market equities (like VTI and VOO) to specific sectors and bond types. By passively mirroring an index, Vanguard ETFs generally have low expense ratios, meaning investors retain more returns.
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VOO (Vanguard S&P 500 ETF)
- Assets: $355.1 billion
- Holdings: 505 stocks
- Dividend yield: 1.43%
- Expense ratio: 0.03%
Thus, it is no wonder that this index fund, with over $300 billion in assets tracking the S&P 500, is preferred by pro-passive investors.
As a market-cap-weighted index fund, VOO mirrors the composition of the S&P 500, investing in 505 large-cap U.S. companies. While the index is named the S&P 500, it actually includes 505 stocks due to companies having multiple share classes. A prime example is Alphabet, which trades as both GOOGL and GOOG.
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VTI (Vanguard Total Stock Market ETF)
Vanguard’s Total Stock Market ETF (VTI) offers broad exposure to the U.S. equity market with:
- Assets: $329.5 billion
- Holdings: 3,761 stocks
- Dividend yield: 1.39%
- Expense ratio: 0.03%
Unlike ETFs focused on large-cap stocks like the S&P 500, VTI tracks the CRSP U.S. Total Market Index, encompassing all U.S. stocks, from small-cap to large-cap. This provides a more comprehensive representation of the entire U.S. stock market.
While VTI holds significantly more stocks than S&P 500-based ETFs, its market-cap weighting means the most prominent companies still dominate its holdings. Nevertheless, VTI offers greater diversification by including a more comprehensive range of company sizes.
Evaluating VTI vs. VOO: What to Consider
Several essential factors help you choose between VTI and VOO. To identify your financial objectives for each investment option, you should assess both funds’ holdings while examining their performance.
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Consider Your Investment Objectives
Your investing style is one major thing that can influence your choice between VTI or VOO.
- VTI: Ideal for hands-off investors seeking broad market exposure.
- VOO: Better for strategic allocators or those favoring large-cap stocks.
Past performance is not indicative of future results. Ultimately, your financial goals and risk tolerance should guide your decision.
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Understand Holdings
VTI and VOO largely overlap, both tracking the S&P 500. Nonetheless, VTI encompasses the entire U.S. stock market, thereby making it a broader choice for those seeking exposure to smaller companies.
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Review Expense Ratios
The VTI and VOO expense ratios are just 0.03%, while the average expense ratio of similar funds is 0.78%. Lower costs mean more of your money works for you over time, which is perfect for maximizing long-term returns.
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Analyze Performance Metrics
Due to their market-cap weighting, both VTI and VOO are heavily influenced by the performance of mega-cap tech stocks. VOO’s larger positions in these companies have driven its recent outperformance over VTI. However, VTI’s broader diversification may offer advantages in different market environments.
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Compare Dividend Figures
VTI and VOO currently boast a similar dividend yield of 1.3%. However, there’s a notable difference in quarterly payouts. While VTI’s distributions have fluctuated between $0.79 and $1 per share over the past year, VOO has delivered more substantial payments, ranging from $1.49 to $1.80 per share during the same period.
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Weigh Growth Potential
VTI and VOO both show promising long-term growth prospects. VOO tends to perform better because it holds a lot of tech stocks, but this can also make it more unpredictable. For investors looking far ahead, the gap between these two is negligible.
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Evaluate the Impact of Market Conditions
VTI and VOO track the overall market, so their performance is tied to broader market trends. To manage risk, consider holding cash and bonds alongside these ETFs. Based on the risk tolerance, allocate 10-40% to treasury funds. Regular rebalancing is crucial to maintaining your desired asset mix.
VTI vs VOO — Side-by-Side Comparison
Which ETF Should You Invest In?
VTI is ideal for investors for whom diversification matters in investment portfolios. This fund is best suited for those with a long-term investment horizon and the ability to weather market fluctuations. If you believe that the dominance of big tech may be waning, VTI’s broader market exposure could be advantageous.
VOO is a suitable choice for investors focused on the largest U.S. companies. It offers exposure to big tech but also carries the associated volatility. VOO could be a good fit if you’re comfortable with this risk and prefer a concentrated investment in large-cap stocks. Consider complementing VOO with other investments to diversify your portfolio or maintaining simplicity by pairing it with a Treasury fund.
Bottom Line
VTI and VOO are both solid choices for long-term U.S. equity exposure. VOO focuses on large-cap companies, while VTI includes small and mid-cap stocks.
If you seek broader market coverage, VTI might be preferable. Otherwise, VOO offers a more concentrated large-cap approach.
