VTI vs. VTSAX: How Different Are These Index Funds?

Why Do Investors Choose VTI and VTSAX?

While it may seem advantageous to start investing money in individual stocks on your own, there are benefits to investing in index funds through ETFs and mutual funds.

Because VTI and VTSAX (and similar investments) come with built-in diversification, they involve less risk than individual stocks and bonds.

In the long run, index funds which follow the S&P 500 return around 10%, the historical annual market return since the 1920s. 

While you can’t capture alpha (outperforming the market) like you might with individual stocks you find using the best stock research apps and software, you also won’t do worse than it.

In my own assessment, it’s hard to argue with the attractiveness of a 10% average annual return which costs you almost nothing to receive over long periods of time.

As an alternative, you could take the time to analyze countless individual stocks and morph them into your ideal portfolio with a service like M1 Finance, but buying VTI or VTSAX is both simpler and statistically more likely to perform well.

You can invest in some stock picking services to attempt to beat the market.

While individual stocks can (and sometimes do) go down to zero, this hasn’t ever happened with index funds.

Instead, index funds represent the most straightforward, cheapest, and dependable way to see strong long-term returns in your portfolio.

Mutual funds and ETFs can often be actively managed by experts who pick and monitor the stocks or bonds to ensure the fund doesn’t stray too far from the target index.

Despite some index funds being considered “actively managed,” they have a clear guide to follow for their investments: their underlying index fund benchmark.

Similar to tracing an outline in a kid’s drawing book, these fund managers have a cheat sheet for knowing which holdings to maintain and at which amount in the mutual fund or ETF.

If you want to supplement your portfolio with other stocks, you can do so in addition to holding VTI and/or VTSAX as majority allocations for your net worth

In fact, both beginners and experienced traders often hold these funds in their portfolios because they know how powerful matching an index’s performance can be over long periods of time.  Therefore, it’s worth learning about them and giving them due investment consideration. 

What are the Similarities Between VTI and VTSAX?

woman in mirror

When you look at the commonalities between VTI and VTSAX, it becomes clear why people often mistake one for the other. In 1975, investor John “Jack” Bogle founded Vanguard, which ultimately created both VTI and VTSAX.

Bogle believed it’s better to follow the stock market than to fight it, hoping to capture some alpha from choosing individual securities.

Therefore, VTI and VTSAX are both based on the CRSP U.S. Total Market Index and cover nearly the entire U.S. stock market. As of 04/30/2020, VTI & VTSAX have $822.4B total assets each.

They both have about 3,500 stocks and the technology sector is most prominent at 24.23%, followed by financials at 16.86%, and healthcare at 14.78%. Mostly, the same stocks make up the highest percentage of their assets. 

To get a sense for how their holdings vary by sector, have a look at the following chart for both VTSAX and VTI (updated as of 4/30/2020):

VTSAX equity exposure

As for how the top 10 holdings compare for both investments, they have the following five holdings represent the largest shares as a percentage of assets:

vtsax vs vti top 10 largest holdings

As for the specific similarities between VTI vs. VTSAX, consider the following items:

  1. Very similar expense ratio with VTI at 0.03% and VTSAX at 0.04%.
  2. Extremely similar returns over equivalent periods of time.
  3. Further, the overall performance of the two is roughly the same.
  4. These income-generating investments have nearly identical yields: 1.81% for VTI and 1.80% for VTSAX (as of 5/31/2020).
  5. You can choose to reinvest this passive income.
  6. These are solid options for investors who don’t want to pick out a bunch of individual stocks.
  7. Vanguard still assesses a $20 annual account service fee if your account with them has less than $10,000 in assets invested.

On almost all dimensions, the two funds appear nearly identical.  However, as you’ll learn in the next section, while VTI and VTSAX have many similarities, there are a few key differentiators.

What is the Difference Between VTI and VTSAX?

man sitting at laptop thinking medium

→ ETF vs. Mutual Fund

The clearest distinction between VTI and VTSAX is that VTI is an ETF while VTSAX is a mutual fund. ETFs trade like stocks do with real-time pricing while the stock market is open.

A mutual fund’s price settles at the end of market trading each day when its Net Asset Value (NAV) calculates based on the buy and sell orders put in place since the last settlement date.

This means on any particular day, you receive the same price as anybody else, regardless of what time of day you put in your order. It also means you won’t know the exact amount you pay until the trading day has finished.

Depending on your stock trading platform (consider some of these best Robinhood alternatives if you want a self-directed, zero commission broker), you may or may not have to pay a trading fee with an ETF.

If you want to trade equities quicker, an ETF represents the better option because it establishes better price certainty and timing on execution.

However, if you want to make a long-term investment without much dependence on market timing, the difference is negligible.

→ Automated Investing

Another factor to consider is that sometimes with mutual funds, enrollment in automated investing can be easier because mutual funds do not have a set price level for additional investment. 

In other words, you do not need to set aside a specific amount of money per share like you might when buying a share of an ETF or stock because mutual funds trade on fractional shares. 

For example, if you had $50 to purchase a share of a mutual fund but its price was $100/share, you could purchase half of a share with your $50. With an ETF, if an trades at $150 and you have $2,000 set aside for investing, you can’t put the full $2,000 in the ETF.

With most brokerages, you can invest $1,950 of that sum by purchasing 13 shares in the ETF, but you would either have to save the remaining $50 or invest it in a handful of penny stocks.

Now, some fintech investing services like M1 Finance allow you to purchase fractional shares in stocks and ETFs.  It works when the service breaking shares into 1/100,000 of a share, thereby allowing you to trade specific dollar amounts which can better match your portfolio targets. 

However, some mutual funds still have minimum initial investment thresholds established by the fund companies and are not something a discount broker can overcome. 

For example, the minimum investment to purchase VTSAX is $3,000, which may be intimidating to new investors. Once you’ve hit the minimum, you can invest any amount over it that you want.

VTI has no minimum initial investment beyond the cost of purchasing one share. You simply have to buy at least one share at the current market price.

At the time of this writing, VTI costs less than $150, which is much more accessible to start investing in early with some of the best financial apps for young adults.

→ Tax Efficiency

Generally speaking, ETFs have greater tax efficiency than mutual funds.  In this case, VTI would count as a more tax efficient investment than VTSAX.

The primary reason for this involves the nature of how the fund structures investor share balancing, specifically whether the fund counts as an open-ended or closed-end fund:

  • Open-ended vs. closed-end fund. Mutual funds and ETFs are either: open-ended—meaning the investment trades between an investor and the fund with a limitless number of shares available to the investing public; or closed-end—the fund issues a fixed number of shares for public investment, regardless of investor demand.

managing a portfolio of investments

Typically, ETFs are closed-end investments while mutual funds can be either open or closed-end funds. Because of the common closed-end nature of ETFs, they tend to have lower capital gains than mutual funds because of how they trade in the market.

Specifically, when an investor sells shares in a mutual fund, such as VTSAX, the investor sells the shares back to the fund (open-ended), causing the fund to redeem the shares and sell the underlying assets to provide the investor with cash equivalent to the investment. Alternatively, mutual funds can keep cash on hand to avoid selling the underlying assets at an inopportune time. 

Regardless, this sale counts as a taxable event to the investor and can trigger capital gains to other holders of the mutual fund when the fund realizes net capital gains from the sale of fund shares during the calendar year.

Additionally, the investor may have to pay taxes on a proportionate share of the fund’s capital gains realized during the year. In the event the mutual fund sells securities for a net profit (meaning the gains cannot be offset by losses), the law requires the mutual fund to distribute these capital gains to shareholders. 

Typically, these capital gains distributions occur toward the end of the year as the fund may generate offsetting losses toward the end of the year, thereby avoiding distributing these capital gains to investors.

With ETFs, on the other hand, assets trade person-to-person as opposed to person-to-fund like with most mutual funds (closed-end).  Therefore, when someone sells, the fund doesn’t need to sell the underlying assets and redeem the shares.

The best target date funds also encounter this same tax efficiency dynamic depending on whether they are structured as ETFs or mutual funds.

To get a better sense of how ETFs and mutual funds compare, have a look at the infographic I created below.

etf vs mutual fund

The difference becomes fairly negligible if you plan to hold either as a long-term investment. The logical question you’re likely asking yourself right now is, “Which should I invest in?” Fortunately, because you’re likely to see very similar returns, this isn’t a question to stress yourself out about too much. To decide, ask yourself a few questions, including:

  • Am I investing long-term or short-term? If long-term, either works. For short-term, VTI may be better, but both are ideally long-term to build wealth.
  • Do I want to dedicate a specific sum to my investment or do I mind it being slightly higher or lower depending on share price? If you can adjust the amount you invest, either works. If there is a specific amount you set aside, VTSAX may be better because of the fractional share purchasing opportunity presented by mutual funds unless you invest with a service like M1 Finance which allows fractional share purchases on stocks and ETFs.
  • Do I currently have at least $3,000 to invest? If yes, either works. If no, you can only invest in VTI.

Remember that, while both VTI and VTSAX are historically some of the safer investments over long periods of time, there is still a degree of risk always involved when investing in the stock market.

With that risk often comes gains much more significant than that of a high-yield savings account or even Certificates of Deposit (CD) (both recommended as some of the best short-term investments for young investors), but this money isn’t insured like money put into savings. Carefully weigh the risks and benefits. 

If you already know you want to invest in VTI or VTSAX, your next step is deciding what platform to invest through. With this question, you quickly learn that another difference between VTI and VTSAX is that you’re able to invest in VTI through many more trading platforms than VTSAX.

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