Having an S&P 500 fund in your portfolio seems like a must for every prudent investor. But which of the endless array of such funds is actually the best to hold? Today, we’re comparing two Vanguard S&P 500 funds: VOO vs. VOOG.
One is the Vanguard S&P 500 ETF (VOO) and the other one the Vanguard S&P 500 Growth ETF (VOOG). So, what’s the difference between these two and which one performs better?
Overall, VOOG performs better than VOO with a compound annual growth rate (CAGR) of 14.30% compared to 12.09%. VOO is more volatile than VOOG and also experiences higher drawdowns of up to -19.58%. VOO has an expense ratio of only 0.03% while VOOG charges 0.10% per year. Another major difference between VOO and VOOG is that VOO holds almost twice as many securities as VOOG (503 vs. 276).
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VOO vs. VOOG: Overview
Today, we’ll look at the differences and similarities between VOO and VOOG. We’ll start with a basic overview of key differences in inception date, holdings, and fees and then move on differences in fund composition and industry exposure.
In the later sections, we’ll also take a look at some risk metrics such as volatility and drawdowns and conclude by comparing the performance of both funds through backtesting.
What’s The Difference between VOO and VOOG?
|Name||Vanguard S&P 500 ETF||Vanguard S&P 500 Growth ETF|
|Index||S&P 500 Index||S&P 500 Growth Index|
The Vanguard S&P 500 ETF (VOO) tracks the 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 S&P 500 Growth ETF (VOOG) tracks the S&P 500 Growth Index. This index includes growth stocks based on their sales growth, the ratio of earnings change to price, and momentum.
As a result, VOOG is heavier weighted towards large-cap companies while VOO has a larger exposure to mid-cap stocks.
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.
VOOG has an expense ratio of 0.10%. This is more than three times higher than that of VOO. This means you would pay around $10 in fees per year for every $10,000 invested in VOOG compared to the $3 you would pay for VOO.
This comes down to a difference of $7 per year on a $10,000 portfolio. Obviously, this would not seem like a huge price to pay for a better performing portfolio but these discrepancies might add up in the long run.
VOO and VOOG 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)
One additional major difference between VOO and VOOG is the number of seurities they hold. As an S&P 500 fund, VOO of course holds roughly 500 securities. On the other hand, VOOG only holds 276 companies at the time of writing.
Thus, you’ll get greater diversification by investing in VOO.
The assets under management also differ substantially. VOO is one of the most popular funds on the ETF market holding some $143B in investor assets. This makes VOO the fourth-largest ETF by market cap:
VOOG does not even appear on this list as it currently manages less than $5B in total.
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VOO vs. VOOG: 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%.
VOOG is made up nearly exclusively of large-cap companies which represent a whopping 92% of the fund’s total market equity capitalization. The remaining 8% is made up of mid-cap companies. As with VOO, there are no small-cap companies included in VOOG.
Thus, with VOO you will get a slightly broader market exposure than with VOOG. VOOG focuses even more on the large player and growth companies which tend to be present in the technology sector.
VOO is 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 adding up to only about 6-7%.
However, VOOG is even more exposed to the tech sector than VOO. Tech stocks in VOOG make up around one-third of the fund’s total market cap. As a result, all other sectors have been pushed back substantially.
The second-largest industries are communication services, healthcare, financial service, and consumer cyclical. Each of these makes up around 10% of VOOG.
Utilities, energy, basic materials also represent the smallest portion of VOOG.
VOO vs. VOOG: 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%||2.16%|
|US Market Correlation||1||0.97|
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.
VOOG has an annual volatility of 12.89% (3.72% monthly). This is just slightly lower than VOO’s volatility which makes sense if we think back to VOOG’s composition. Larger-cap companies always tend to be less volatile than the long-tail of the stock market.
Thus, if you prefer a more stable portfolio VOOG might be the better choice here.
The above chart depicts the drawdowns for VOO and VOOG over the past decade.
As you can see, VOO regularly experiences far heavier drawdowns than VOOG. Especially in 2011/2012 and most recently in 2020 VOO lost around 15-20% in value. During the same time frame VOOG managed to reduce overall losses and end up with a drawdown peaking at around 13-16%.
These tendencies are also reflected in the maximum drawdown of each fund. VOO has a maximum drawdown of -19.58% over the past 10 years while VOOG’s maximum drawdown was -16.30%.
That’s a difference of more than 3 percentage points.
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VOO vs. VOOG: 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.
The above differences in volatility and maximum drawdown lead to varying annual returns.
What’s most striking about this chart is that in 2018 and 2020, when VOO had a negative return of roughly -5%, VOOG managed to come out at a breakeven point or even turn a profit (as is the case so far in 2020).
In economic growth times, VOOG also regularly outperforms VOO such as in 2014, 2015, and 2017. There are only a couple of years where the contrary is the case.
|Portfolio||Initial Balance||Final Balance||CAGR|
In the graphic below you’ll see the cumulative performance of VOO (blue) and VOOG (red) with a $10,000 investment in 2010. This portfolio growth assumes that all returns – including dividends – are reinvested and furhter contributions have been made.
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 VOOG would have resulted in $35,208 with a CAGR of 14.30%. This is significantly better than VOO. To be exact, VOOG would have yielded $5,895 more than VOO over the same time frame.
So, why does VOOG outperform VOO in the long run despite the higher expense ratio? The answer simply is the fund composition. During the past decade large-cap companies have profited even more and tech giants such as Amazon, Apple and Google have had their most profitable years yet.
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There are some key difference between VOO and VOOG. Although both funds are comprised of S&P 500 stocks VOOG focuses on growth.
VOOG is comprised to a much larger degree of large-cap companies and has increased exposure to the tech sector. This makes it suitable for fast growth but increased the exposure risk should the tech sector’s growth slow down.
VOO provides more diversification at lower fees. But are these benefits really worth earning 3% less on your capital every year?
The numbers speak for themselves.
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Thank you very much for this detailed blog, love it and you have made my research in to investing in to my first ETF much more clearer.