Investing over the long term requires patience and consistency. When I first started investing I wanted to make sure to pick the best ETF possible since I was going to stick with this one probably for the rest of my investment carrier. Comparing VTI vs. SCHB is like comparing twins from different parents. Both are extremely similar in build and personality – just the companies behind them are quite different.
So, which ETF is better? In terms of performance, VTI and SCHB are the same. VTI and SCHB also have the exact same expense ratio and fees. VTI could be considered the better option since it is issued by Vanguard, a company set up with a unique ownership structure that makes every investor a shareholder. Other than that, both ETFs provide a solid investment option.
However, we’ll have a bit more in depth look at these to big players in the next few paragraphs.
VTI vs. SCHB – Overview
In this post, I am going to focus on the key difference between VTI and SCHB. We’ll look at their metrics but also at the companies behind the funds. We’ll also see if and how they differ in max. drawdowns and volatility. In the last section, I have backtested a 10+ year performance of two portfolios of VTI vs. SCHB.
VTI vs. SCHB – What’s The Difference?
|Name||Vanguard Total Stock Market ETF||Schwab U.S. Broad Market ETF|
|Index||CRSP US Total Market Index||Dow Jones U.S. Broad Stock Market Total Return Index|
The Vanguard Total Stock Market ETF (VTI) tracks the CRSP US Total Market Index. This index was founded by the Center for research in security prices (CRSP), a highly respected organization in the field of market indices. The index tracks stocks traded on the NASDAQ, ARCA, and the New York Stock Exchange and aims to replicate the performance of the entire U.S. market representing around 4,000 constituents.
The Schwab U.S. Broad Market ETF (SCHB) tracks the Dow Jones U.S. Broad Stock Market Total Return Index. This one is a member of the Dow Jones Total Stock Market Indices family and includes large-cap, mid-cap, and small-cap stocks of all industries. With around 3,000 constituents, this index represents nearly 99% of the total stock market.
Both of these indices accomplish pretty much the same: tracking the U.S. total market performance with an accuracy of around 99%. However, although both indices look very similar on the surface there are some minor differences which can have an impact on their overall performance and drawdowns as we will see later.
CRSP includes 1,000 more companies in their index and will – as a result – have an even higher correlation of the U.S. market. Although this difference might be minute, if you are looking to replicate the market as closely as possible VTI by Vanguard is the winner here vs. SCHB.
VTI and SCHB both have an expense ratio of 0.03%. This is about the lowest ratio you will find on any ETF in the entire industry. One reason both funds are able to offer fees this low is that there is very little administrative labor involved in the upkeep and maintenance of the fund since its composition does not really change over time.
Other common funds such as VIG or VYM sport slightly higher ratios since their portfolio has to be adjusted every time a company decides to change its dividend strategy. Thus resulting in higher expense ratios of 0.06%. That being said, anything with fees below 0.1% is very good and definitely worth looking into.
VTI is issued by Vanguard, one of my favorite companies to invest in. This is not only due to their super low fees but also their unique ownership structure by which investors actually become part-owners of the company itself. If you are interested to know more about this check out the post I wrote here.
SCHB is issued by Charles Schwab. Schwab is not only one of the biggest brokerage firms in the U.S. but also its own bank. This can offer several advantages to the active investor since cash balances are FDIC insured and backed by the U.S. government. Schwab also offers more tools and options for the enterprising investor.
In summary, both companies, Vanguard and Schwab are excellent, safe and stable choices when it comes to investing for the long-term. I still have a slight preference for Vanguard because of the ownership structure and maybe because of the nostalgic reason that Jack Bogle was the first to introduce the world to index funds.
VTI was started in 2001 which gives us nearly 20 years to compare its overall performance to any competitors. It is also worth pointing out that this time frame includes the market crash of 2008/2009 which remains a strong indication of a fund’s performance in market downturns and maximum drawdowns.
SCHB was started quite a bit later in 2009. This means we’ll only about half the time period when comparing VTI to SCHB. Also, the market crash of 2008 is not included in the fund’s historical performance.
However, both exchange-traded funds have been active for 10+ years can give us insights over more than a decade as to their returns and performance.
VTI has net assets of $130B “under management”. Yes, that’s right – 1 3 0 Billion Dollars. With this amount of assets it is among the top 5 of the largest ETFs worldwide:
SCHB has some $13.9B of assets under management which is almost 10 times less than Vanguard’s fund. This is not to say that more is necessarily better, but it gives you an idea of the difference in popularity between these two funds.
When it comes to the net assets there should not be a concern with either of these ETFs. Tradability is not an issue with funds this big and liquidity is obviously excellent.
Next, we’ll take a look at how the two ETFs are composed in terms of their distribution between large-, mid- and small-cap stocks. This will give us insight into possible over- and underexposures in certain market segments we need to look out for.
VTI Market Capitalization
The pie chart above shows how equity is distributed between the three market cap classes for VTI. Large-cap companies take up 76.4% of all assets followed by mid-cap stocks at 17.3% and the remaining 6.3% are small-cap companies.
These distributions of assets resemble almost 100% those of the entire U.S. stock market – not surprising of course since this is the main aim of VTI.
SCHB Market Capitalization
The equity market capitalization of SCHB looks naturally very similar to that of VTI with large-cap companies making up 76.5%, mid-cap stocks 17.5%, and small-cap stocks 6%.
Already here we can see that although both funds aim to do the exact same thing, there are slight differences in their composition: Schwab’s fund includes less small-cap companies. This is a result of the difference in the index we saw above. SCHB holds about 1,000 constituents less than VTI, all of which are small-cap stocks.
In the following section, we’ll examine the industry exposure of both VTI and SCHB.
If you’re considering combining several ETFs in your portfolio you might want to make sure that you are equally exposed to all sectors of industry. These charts may also make us aware of shortcomings in the index’s policy, excluding or over-including certain sectors.
VTI is made up – as is the entire U.S. economy – to a great part of tech stocks. The technology sector is dominating the ETF with a share of around 20%. This is followed by financial services and healthcare. Basic materials, utilities, and energy make up the smallest parts of the fund.
It is worth to point out that REITs are included in this ETF which leads real estate to make up close to 5% of the fund.
SCHB is dominated by technology stocks as well. Tech stocks even make up a slightly higher percentage here. In turn, this is followed by healthcare second and financial services third. Basic materials, energy, and utilities come in last and real estate is included in SCHB about as much as it is in VTI.
From the above difference in industry exposure, we can conclude the following: because SCHB is lightly less exposed to some 1,000 small-cap companies, the tech sectors with its many Fortune 500 companies dominates this index even more than it does the entire U.S. market.
My point from above stands here as well. If you are looking to replicate the U.S. market as closely as possible VTI is your best bet.
But, I think there is a more interesting question: do these differences in composition actually affect the funds’ performance and risk?
Let’s find out!
VTI vs. SCHB – Analysis
Now, we’ll take a look at some of the risk metrics associated with volatility and maximum drawdowns. This may be especially important to the conservative investor aiming for stability in growth.
|Downside Deviation (monthly)||2.65%||2.64%|
|US Market Correlation||1||1|
VTI has a monthly volatility of 4% compared to SCHB’s 3.98%. Also, VTI’s annualized volatility is a bit higher at 13.87% than that of SCHB. What’s striking, however, is that although Vanguard’s fund seems to be more volatile than Schwab’s, SCHB has a higher maximum drawdown of -20.94%.
Could it be that including more small-cap companies can be more volatile in the short term but protects investors from a higher drawdown in the long term?
The following chart illustrates what I have alluded to before: we are unfortunately unable to compare the valuable historic data of the 2008 market crash.
VTI vs. SCHB – Performance
In the previous sections, we have looked at some key differences between VTI and SCHB. We have seen how they differ in their fund composition and industry exposure. During the risk analysis, we have also noticed the difference in volatility and drawdowns between the two funds.
For this next part, we will see how the above differences are reflected in the fund’s overall historical returns.
The first thing that is apparent when looking at this chart is that both funds perform almost equally in the last ten years. In some years of economic decline such as the one we are experiencing right now in 2020, it looks like there might be some benefit in including more small-cap stocks as SCHB is showing a higher drawdown that VTI currently. We see a similar trend in 2018 as well although the difference may not be as apparent.
In times of economic boom, both funds perform similarly. Some years SCHB is ahead slightly and some VTI. Let’s have a look at a backtested portfolio of $10,000 to see how an accumulated performance would have looked like over the years:
The chart above illustrates the hypothetical growth of $10,000 USD if invested at the inception of both ETFs in 2009:
Both portfolios would have resulted in around $28,000 USD today. You can barely even see the blue line of VTI since it is hidden behind the red one: difference in performance? I don’t think so.
So, what does all this mean?
Both funds seem to perform about the same, there are more similarities between these ETFs than differences! Why should you choose one over the other?
The only real difference is the company that is behind the ETF. I have decided to “trust” Vanguard with my retirement journey and my financial independence. And I put “trust” in quotation marks because trust is actually not involved. As investors in a Vanguard fund, you become an actual shareholder in the company.
Here’s my suggestion: why not keep using Vanguard’s excellent products, but invest in them through an innovative no-commission broker like M1 Finance.
Thus the difference in company philosophy may be the only true differentiating factor between these two funds. And perhaps, in the end, it also just comes down to which fund you have access to!
What are your thoughts on VTI vs. SCHB? Do you trust Jack more than Charles? 😉
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!
1) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!
2) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
3) If you are interested in crypto, check out Coinbase. I've started allocating a small amount of assets to the growing crypto space and Coinbase has just been a breeze to use. Once you register, make sure to also open a Coinbase Pro account to buy crypto at the lowest fees on the market (just 0.1%!).