VTI vs. ITOT – What’s The Difference?

Vanguard’s Total Stock Market Fund is one of the most popular ETFs on the market. In fact, it was the very first index fund I ever invested in. There are several competitor funds that aim to achieve the same returns. One of these is the one we’re going to talk about today: iShares’ Core S&P Total U.S. Stock Market ETF. But what exactly is the difference between VTI vs. ITOT and which of these funds is better?

So, what’s the difference? Both funds have an expense ratio of 0.03%. VTI has more than $135B assets under management, compared to ITOT’s $23.7B. In terms of holdings, ITOT holds about 100 more securities than VTI. Overall, however, VTI yields higher returns with a compound annual growth rate (CAGR) of 8.15% vs. 7.98% for ITOT.

We’ll examine where these differences originate and what exactly causes both funds two perform differently!

VTI vs. ITOT – Overview

In the following sections, I’ll look in more detail at the key differences in the makeup of VTI and ITOT as well as their composition and industry exposure. The later parts of this article will deal with risk metrics such as volatility and drawdowns and finally we’ll look at annual returns and cumulative portfolio growth.

What’s The Difference?

Index/Holdings

The Vanguard Total Stock Market ETF (VTI) tracks the CRSP US Total Market Index. This index aims to replicate the performance of the entire U.S. stock market. At a market correlation of 1.0 it is doing a damn good job at this. The index comprises more than 3,500 securities including large-, mid-, and small-cap companies.

The iShares Core S&P Total U.S. Stock Market ETF (ITOT) tracks the S&P Total Market Index. Essentially, both indices strive to accomplish the same thing. This index also has a U.S. market correlation of 1.0 an includes more than 3,600 stocks.

The only real difference here between VTI and ITOT here is that ITOT holds about 100 more securities than VTI. This means ITOT includes a “long tail” of small-cap market stocks that are missing in VTI.

Although the difference is minute and VTI also includes small-cap stocks, we will see later whether this will have an impact on overall performance and returns.

Expense Ratio

VTI and ITOT both have an expense ratio of 0.03%. This is among the lowest on the market. Even though companies like Fidelity offer total market ETFs at 0% fees, they can only do so by promoting them as loss-leaders and making up for this by collecting more fees on their higher-priced products.

With both funds you will end up paying about $3 every year on a portfolio of $10,000. A negligible amount when looking at the big picture.

Issuer

VTI is issued by Vanguard. They are probably the most trusted asset management company out there and for a reason: Vanguard’s investors become owners of The Vanguard Group by investing in their funds. This business model is entirely unique in this industry and also explains why Vanguard’s funds continue to be the most popular:

iShares can certainly stand their ground. Especially, over the last 5 years, iShares has become the clear second choice for fund investors as seen above. While they don’t have such a unique ownership structure as Vanguard, they do offer quality investment products at excellent expense ratios.

To conclude, Vanguard and iShares are both trusted companies that offer high-quality products. However, Vanguard gets the win here because of company structure and underlying philosophy and values.

Inception Date

In 2001 Vanguard issues VTI. It is one of the longest running total market ETFs. ITOT followed about 3 years later in 2004.

Since both funds have been in existence over 15 years they provide excellent historical data for the back-test we will perform later on. In fact, we’ll also be able to see the differences in behavior during the 2008/2009 market crash and subsequent recovery.

Assets under Management

With close to $130B in assets under management, VTI usually hovers around rank 3 or 4 among the top 5 ETFs by market cap:

ITOT has “only” $23.7B under management is nearly eight times smaller than VTI.

However, in terms of trading, both funds offer outstanding liquidity.

Fund Composition

In this section, we’ll take a closer look at the subtle differences in fund composition between VTI and ITOT.

VTI Market Capitalization

As is the entire U.S. stock market, VTI is made up of over three-quarters of large-cap stocks. Mid-cap companies cannot break through the 20% mark and small-cap stocks only make up a meager 6-7%.

This goes to show perhaps mostly the impact of silicon valley and big tech companies who have substantially added to the large-cap piece of the pie in recent decades.

ITOT Market Capitalization

Naturally, ITOT’s equity market capitalization looks rather similar: 76.1% are large-cap stocks, 17.4% mid-cap, and the remaining 6.5% small-cap securities.

Even though the charts look almost identical, there are some slight differences. VTI is weighed a bit more towards large-cap stocks at 76.4% vs. 76.1%. In turn, mid-cap companies also resemble a slightly smaller part of 17.3% vs. 17.4%.

This minute difference in composition simply stems from the fact that ITOT includes around 100 more companies which are made up of the “long tail” of small-cap stocks.

Industry Exposure

As with fund composition, exposure to various industry sectors can benefit a portfolio’s diversification. We’ll examine how this difference in composition between VTI and ITOT is reflected in their industry exposure:

As I have alluded to before, technology is by far the most dominating industry sector of the entire U.S. market and thus of VTI. This is followed by financial services and healthcare in descending order at around 15% exposure.

The least represented sector by market cap is basic materials, energy, and utilities. Real estate actually makes up a healthy 5% of total exposure (REITs included).

The picture for ITOT looks similar. Technology stocks make up somewhere around 20% of total exposure. There is a slightly bigger divide between healthcare and financial services however. As with VTI, basic materials, energy, and utilities are the least covered industries in this fund.

These two graphs nearly look identical, but here’s what’s different: ITOT has a larger exposure to the healthcare sector than VTI. In turn, VTI’s financial services industry represents a bigger chunk of net assets.

We will see in the following sections what impact this difference has on the funds’ volatility and overall returns.

VTI vs. ITOT – Analysis

For the risk-averse investor, a fund’s volatility and maximum drawdown represent important metrics when choosing the appropriate investment vehicle. As a famous investor once said: the first rule of investing is not to lose money.

With that in mind, let’s have a look at the numbers:

Volatility

The monthly volatility for VTI is currently at 4.37% compared to ITOT’s 4.33% which makes VTI slightly more volatile on a monthly basis. The annualized numbers look similar. 15.13% for VTI vs. 14.98% for ITOT. Here, the variance is a bit more pronounced and adds up to 0.15% increased volatility for VTI on an annual basis.

It would appear that the additional 100 small-cap stocks that are included in ITOT have a stabilizing effect on the fund.

Drawdown

Usually, volatility and the maximum drawdown of ETFs go hand in hand. And this is the case here as well! In 2008, VTI experienced a drawdown of 50.84% while ITOT hit rock bottom at 50.76%. A difference of 0.08%.

If we plot the drawdowns each year for VTI and ITOT the graph looks something like this:

What’s noteworthy is that although VTI lost slightly more value in the 2008 crash, it seemed to recover more swiftly than ITOT. If you take a look at the two graphs from 2010 to 2012 you’ll the blue line representing VTI peak out from under ITOT several times.

VTI vs. ITOT – Performance

Now that we have examined how VTI and ITOT differ in composition, exposure, and risk, the last – and perhaps the most important – question is how these differences affect each fund’s returns.

Annual Returns

Before looking at the accumulated portfolio returns, let’s take a look at returns on an annual basis.

What’s striking is, first of all, how close to identical both funds perform. This is perhaps less surprising now that we have seen only very little difference in their composition.

However, there are some variances here as well. As I have pointed out before, VTI had a higher drawdown in 2008 bu also recovered much quicker than ITOT. This becomes apparent when looking at the graphs during those years: VTI is ahead for most of the time from 2009-2012.

This is perhaps where VTI outperformed ITOT.

Portfolio Growth

This graph shows the accumulated returns of two back-tested portfolios of $10,000 each. The blue one has a allocation of 100% in VTI and the red on is 100% ITOT. And here’s the result:

The VTI portfolio with a starting balance of $10,000 would have resulted in a final balance of $33,233. Over a period of 15 years this boils down to a compound annual growth rate of 8.15%.

The ITOT portfolio would have a final balance of $32,467 – around $800 less than VTI. As a result, the CAGR for ITOT drops below 8 to 7.98%.

Despite the additional 100 stocks and increased small-cap exposure ITOT fails to outperform VTI. But why? The answer: tax efficiency.

Take note as to where VTI started outperforming the ITOT portfolio. It was precisely in the economic growth times after 2008. Vanguard has excelled at reducing the capital-gains tax burden for their investors for decades and it pays off here!

Conclusion

As we have seen, the only significant difference between VTI and ITOT lies in the number of holdings, composition, and exposure.

And rather surprisingly, these differences – plus VTI’s tax-efficiency – actually affect performance in a way that VTI comes out with $800 ahead of ITOT.

So, what do we as retail investor do with this information?

Here’s what I’d say. If you’re undecided between the two, pick VTI. Historically, VTI has outperformed ITOT. You’ll also be part of a company that works for investors and is built on Jack Bogle’s legacy.

On the other hand, if you are already invested in ITOT, making the switch to VTI is not necessary in the short term. If you are investing for the long run, however, you might want to consider slowly moving your assets to Vanguard’s funds. There is a reason they have been the most popular asset management company for the 12 years.

Is there anything else you’d like to know about VTI vs. ITOT? Which fund do you prefer?