A showdown between two classic funds: VTI vs. VIG. Vanguard’s Total Market Fund encapsulates the entire market and includes more than 3,000 securities. VIG holds a select few that have increased their dividends for more than 10 years in a row. So, which of these two Vanguard ETFs is actually better? VTI or VIG?
VTI has a lower expense ratio than VIG at 0.03% vs. 0.06%. VIG is also less diversified than VTI holding only around 200 securities while VTI holds more than 3,000. Overall, both funds have performed very similarly: VTI has a compound annual growth rate (CAGR) of 8.64% over the past decade and VIG a CAGR of 8.51%. Thus, historically VTI has yielded slightly higher returns than VIG.
VTI vs. VIG – Overview
In this comparison between two top Vanguard funds I will focus on the key difference between the funds, such as the expense ratio, index and holdings. We will also examine the fund composition, i.e. market capitalization and industry exposure.
In the later sections of this blog post I will dive a bit deeper into some risk metrics as well as their corresponding volatility, drawdowns and overall returns.
What’s The Difference between VTI and VIG?
|Name||Vanguard Total Stock Market ETF||Vanguard Dividend Appreciation ETF|
|Index||CRSP US Total Market Index||NASDAQ US Dividend Achievers Select Index|
The Vanguard Total Stock Market ETF (VTI) tracks the CRSP US Total Market Index. The fund itself holds all the securities that are comprised by the index. The total holdings amount to 3,513 publicly traded companies at the time of writing. This includes nearly every available company stock there is in the United States.
The Vanguard Dividend Appreciation ETF (VIG) tracks the NASDAQ US Dividend Achievers Select Index. The index – and as a result the fund – is much smaller than the Total Market Index. VIG only holds around 200 companies whose dividend payouts have increased over the past decade.
VTI and VIG aim for very different goals and outcomes. It is important to distinguish early between these two strategies or we might end up comparing apples to oranges. VIG aims to provide investors with a stable and growing source of income through dividends. VTI simply gives investors exposure to the entire market.
VTI has an expense ratio of 0.03%. There are very few funds on the market at the moment that can provide similar exposure to the domestic market at a similar or lower fee. Vanguard has managed to reduce the cost associated with investing in the entire U.S. economy even further.
VIG has an expense ratio of 0.06%. Owning VIG will cost you a bit more; to be precise: it will cost you 0.03% more than owning VTI. This amounts to around $3 per year on a $10,000 portfolio. Although the cost may seem low even 0.03% can turn into much more over a lifetime of compounding.
VTI and VIG are issued by Vanguard. Vanguard is by far my favorite asset management company. But I’m not alone with my opinion:
Vanguard has been the clear leader in investment products for many years past. I have elaborated on several reasons for their popularity in a separate post. You can click here to read why Vanguard is the best.
VTI and VIG follow different indexes and as such will have a distinct fund composition of large- and small-cap stocks as well as industry sectors they are exposed too. We will explore those difference now:
Unsurprisingly, VTI’s market capitalization looks like that of the entire U.S. stock market. This probably means Vanguard is doing a good job of emulating the U.S. economy with their VTI fund.
A large percentage of VTI is taken up by large-cap stocks. However, at least 6-7% are small -cap companies that did not make it into the S&P 500.
VIG’s market capitalization is even heavier weighted towards large-cap companies at 85%. As a result, small-cap companies are almost non-existent in the fund. The reason for this is simple: smaller companies tend to focus their efforts on growing the company instead of paying out dividends to shareholders, or even doing so for ten consecutive years.
Owning larger companies in a fund is not necessarily a bad thing, it just means you will be less diversified regarding the depth of the stock market.
When creating a balanced ETF portfolio industry sector analysis plays a vital role in making sure that we are not overexposing ourselves to one industry. Diversification is the only free lunch in investing.
Technology stocks make up the largest portion of VTI’s holdings (~20%). Healthcare and financial services also have their fair share of the fund’s holdings. On the low-end VTI is exposed to utilities, energy, and basic materials to a far lesser degree.
The sector distribution for VIG looks very different: tech companies only amount to 11% in VIG. Instead, industrials come in at a hefty 24% of the fund’s equity. Also, consumer defensive goods play a much bigger role in VIG than in VTI.
This is due to the nature of the underlying index: companies that have increased their dividend payout consecutively (and sacrificed growth in turn) tend to be more industrials. There, the opportunity for growth simply diminishes greatly after the company’s maximum resources have been deployed.
VTI vs. VIG – Analysis
For both funds, the risk metrics might determine which one you would prefer in your portfolio. Are you willing to take on more volatility for a potentially higher reward?
|Downside Deviation (monthly)||3.19%||2.65%|
|US Market Correlation||1||0.96|
VTI has an annual volatility of 15.92%. VIG comes in at more than 200 basis points lower: 13.37%. This difference of more than 2% should fit your personal tolerance to see your portfolio’s value rise and fall substantially.
Companies that increase their dividends over time tend to experience slower growth and tend to be more stable. As a result, VIG is also less volatile than the entire stock market.
The biggest difference between VTI and VIG is the maximum drawdown. VTI experienced a maximum drawdown of over -50% while VIG remained around -40%. This confirms what we intuitively know about dividend stocks: they always fair better in bear markets.
This becomes very visual when we look at the time period between 2008 and 2009 when the financial crisis hit. VIG lost far less value and recovered faster than VTI did.
VTI vs. VIG – Performance
In terms of performance both funds again vary ever so slightly. We’ll have a look at the annual returns first to get an idea of the frequency and ratio of net positive and negative years for both funds. Further below you’ll find the end result for the backtest I conducted with a $10,000 portfolio.
What we suspected above when looking at the drawdowns is confirmed in the annual returns: In 2008/2009 VIG outperformed VTI significantly. On the other hand, in the years following the market crash, VTI gained back everything it had lost and much more; and at a much faster rate than VIG.
The most recent years have been a mixed bag in terms of returns. It remains a close call in the race for the highest returns between VTI vs. VIG.
|Portfolio||Initial Balance||Final Balance||CAGR|
A $10,000 portfolio invested in VTI would have resulted in $30,804. This is equal to a CAGR of 8.64%. This number lies slightly below the average return of the S&P 500 for the last 30 years., however, VTI still outperforms most other funds and bonds over the long term.
A $10,000 portfolio invested in VIG would have resulted in $30,315. This equates to a CAGR of 8.51%. In total, VIG performed just a bit worse than VTI over the tested time frame.
Keep in mind, that it is impossible to say whether this trend will continue or if VIG will be able to close the gap and even overtake VTI in returns.
Perhaps the only real question we should ask ourselves is whether we are willing to pay a higher expense ratio (double!) for a potential of higher returns in the future. Historically, this bet would not have played out well.
In the end, VTI and VIG are two excellence Vanguard ETFs that simply have different goals. The bigger question remains: should invest in dividend stocks or in growth stocks?
Dividend funds such as VIG can make sense as another source of fixed income. However, in bull markets and in rising interest rate environment dividend funds generally tend to fare worse. On the flipside, VIG can protect your portfolio in bear markets.
Overall, my personal pick is still VTI. You simply cannot beat greater diversification at a lower expense ratio.
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 Gemini. I've started allocating a small amount of assets to the growing crypto space and Gemini has just been a breeze to use. Once you register, make sure to also open an Active Trader account to buy crypto at the lowest fees on the market (just 0.03%!).
To see all of my most up-to-date recommendations, check out the Recommended Tools section.