S&P 500 funds have been around for a while. They are well-diversified large-cap funds suited to the long term investor, such as VOO and VFINX. Both of these two funds provide excellent exposure to the large-cap U.S. stock market. But what is the difference between VFINX and VOO?
The key difference is the way the funds are structured. VOO is an exchange-traded fund (ETF), while VFINX is a mutual fund. VFINX also has a higher expense-ratio at 0.14% compared to VOO 0.03%. In terms of performance, VOO outperforms VFINX with a compound annual growth rate of 12.09% to 12.00%.
VFINX vs. VOO: Overview
In this article, we’ll look at some of the subtle differences between VOO and VFINX. We’ll start with an over of their key facts. Then we’ll examine the differences in fund composition, e.g. market capitalization and industry exposure.
Finally, we’ll assess various risk metrics and see how the affect overall performance in our portfolio backtest.
What’s The Difference between VFINX and VOO?
|Name||Vanguard S&P 500 ETF||Vanguard 500 Index Fund Investor Shares|
|Index||S&P 500 Index||S&P 500 Index|
The Vanguard S&P 500 ETF (VOO) tracks the Standard&Poor’s S&P 500 Index. This index is comprised of the 500 largest U.S. companies weighed by market-cap. Thus, the fund does not include any small-cap companies whatsoever.
The Vanguard 500 Index Fund Investor Shares (VFINX) tracks the exact same index. But VFINX is a mutual fund, not an ETF. However, VFINX is not actively managed, so stocks are not actively traded by a fund manager, but selected according to certain index rules.
There is no difference here regarding the stocks that are held through the index. Both VOO and VFINX emulate the S&P 500 Index.
VOO has an expense ratio of 0.03%. In the ETF industry, this is among the lowest you can find. Quite recently Fidelity has been able to offer their funds at even lower fees or even for free. However, this can only be achieved by providing those products as loss-leaders. For now, 0.03% seems to be the lowest sustainable fee for any ETF.
VFINX has an expense ratio of 0.14%. This is nearly five times as high as that of VOO. This means that an investment of $10,000 in VFINX would cost you around $14 in fees per year while the same investment in VOO would only cost you $3.
This is obviously not a huge amount in relation to $10,000 but these small differences can add up as we will see later on.
VOO and VFINX are both issued by Vanguard. Overall Vanguard is my favorite company to invest with. Or rather their financial products and index funds are my favorite products to invest in. They tend to be well-diversified funds with very low fees.
Vanguard also has a unique corporate philosophy of putting investors first which I find very appealing. (Read: Why Vanguard Is The Best)
If we look at the inception, you’ll notice that VFINX is much older than VOO. VOO was only started in 2010 while VFINX has been running for over 40 years now.
In November 2018, Vanguard has decided to restructure their investment products. As a result, VFINX is no longer available to new investors.
Instead, you can now invest in VFIAX. VFIAX holds the exact same securities as VFINX but has a lower expense ratio and a lower minimum investment.
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VFINX vs. VOO: Fund Composition
In this section, we’ll take a look at both funds’ composition. We’ll start by comparing their equity market capitalization which expresses the weight of large-, mid- and small-cap companies.
Equity Market Capitalization
In the pie charts below I have put both funds’ market capitalization next to one another to illustrate one simple point: VOO and VFINX have the exact same holdings.
87.8% of VOO and VFINX are large-cap companies and the remaining ~12% are mid-cap stocks.
This exposure to large-cap companies is significantly higher than the entire U.S. stock market which hovers somewhere around 75%.
When it comes to industry exposure, the same is true as above: VOO and VFINX are exposed to exactly the same industries since the hold the same securities.
Both funds are dominated by technology stocks making up nearly one-quarter of the funds total market cap. This is followed by the healthcare and financial services sector at around 15% and 13% respectively.
Basic materials, energy, and real estate companies make up the smallest portion of VOO and VFINX adding up to only about 6-7%.
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VFINX vs. VOO: Analysis
Next, we’ll examine some risk metrics such as volatility and maximum drawdown. This will give us some insight into whether these funds are suited for a long-term portfolio. Generally, we want to avoid huge swings in our portfolio value, especially once that portfolio has matured over time.
|Downside Deviation (monthly)||2.40%||2.41%|
|US Market Correlation||1||1|
VOO has an annual volatility of 13.13% (3.79% monthly). This is fairly common and right in line with the volatility of the domestic market in recent years. As is the case with this fund, large-cap companies tend to be a bit less volatile than small-cap stocks. This makes VOO a good option for more stability.
VFINX has an annual volatility of 13.17% (3.80% monthly). If we trust that the data is correct we must come to the conclusion that VFINX is slightly more volatile than VOO.
So, how can there be a difference in volatility if both funds hold the exact same stocks? Well, the answer lies in the different ways in which they are traded. Since VOO is an exchange-traded fund its price fluctuates throughout the day. VFINX, however, is only bought and sold once a day at a closing price.
This perhaps gives rise to difference in volatility between VOO and VFINX.
Before we get into the number I want you to have a look at them visually. Below you’ll see the drawdowns of VOO and VFINX from 2011 to 2020:
And as you can see, there basically is no difference in drawdowns.
VOO and VFINX experienced several minor and some major drawdowns – notably in 2012 and now in 2020. On paper there is a slight difference as well:
VOO has a maximum drawdown of -19.58% compared to VFINX’s maximum drawdown of -19.63%. This simply stems from the increased volatility that VFINX faces through its trading mechanisms.
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VFINX vs. VOO: Performance
Finally, to conclude this comparison we’ll examine the differences in performance. First, we’ll look at the annual returns of both funds, followed by a side-by-side comparison of both funds’ cumulative performance over the years.
VOO and VFINX essentially have the same annual returns. This probably comes as no surprise by now since they are made up of the same stocks.
However, it is worth to point out that VOO had better returns in some of the years. Notably, in 2012, 2013, 2014, 2016 and 2017 it looks like the blue bar goes slightly higher than the red.
We’ll see how these differences play out in the accumulative returns next!
In the graphic below you’ll see the cumulative performance of VOO (blue) and VFINX (red) with a $10,000 investment in 2011. This portfolio growth assumes that all returns – including dividends – are reinvested and furhter contribution have been made.
|Portfolio||Initial Balance||Final Balance||CAGR|
A $10,000 investment in VOO would have resulted in $29,303 by now with a compound annual growth rate (CAGR) of 12.09%. This by itself is of course a fantastic return. You would have essentially tripled your money within 10 years.
A $10,000 investment in VFINX would have resulted in $29,065 with a CAGR of 12.00%. Compared to VOO that is just a little bit lower. To be exact, it is a difference of $238.
So, why does VOO outperform VFINX in the long run? The answer is quite simple: fees. VFINX charges almost five times the annual fees that VOO does. And as a result, VFINX’s cumulative performance lags behind by $238.
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There are important structural differences between VOO and VFINX. VOO is an ETF and VFINX is a mutual fund. With this comes a difference in expense ratios as well.
Besides those differences, however, VOO and VFINX are essentially the same.
We have also seen that this difference in fees affect the funds’ performance to a degree that VOO comes out ahead by $238 over about 10 years.
Other than that, differences are negligible. Both funds are excellent choices for us as index fund investors. If you prefer the structural advantages of a mutual fund VFINX (or now VFIAX) is the fund for you. If you’d rather enjoy the simplicity and flexibility of an exchange-traded fund, pick VOO.
In the long run, it won’t make much of a difference.
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