Vanguard has been my go-to asset management company for all things index funds. Lately, I have been looking at other offerings, in particular, VTSAX vs. SWTSX, to see whether they have caught up or perhaps even surpassed Vanguard’s products.
VTSAX is without a doubt Vanguard’s most well-known fund. The counterpart from Charles Schwab is SWTSX. How do these two compare to each other? What are the differences? Which one is better?
Which fund is better? The overall returns for both VTSAX and SWTSX are very similar. SWTSX does have a lower expense ratio, however, VTSAX also holds a larger number of securities. Another difference lies in their minimum investment requirements: VTSAX requires a minimum of $3,000 while you can invest in SWTSX at the price of a single share.
Both funds seem like a solid basis for a long-term portfolio, but let look at some the differences between these two in a bit more detail!
VTSAX vs. SWTSX – Overview
In this post I’ll highlight some of the key differences between VTSAX and SWTSX. We’ll take a look at their difference in composition, exposure to different industries as well as overall performance, and annual returns.
Are you as excited as I am? 😀 Let’s go!
What’s The Difference?
| VTSAX | SWTSX | |
| Name | Vanguard Total Stock Market Index Fund Admiral Shares | Schwab Total Stock Market Index Fund |
| Index | – | Dow Jones U.S. Total Stock Market Index |
| Expense Ratio | 0.04% | 0.03% |
| Issuer | Vanguard | Schwab |
| Structure | Mutual Fund | Mutual Fund |
| Minimum Investment | $3,000 | Price of 1 Share |
| AUM | $134B | $ 8.8B |
| Holdings | 3,680 | 3,059 |
Index
The Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is structured like a mutual fund. This means it does not actively track any index per so. However, it performs pretty much exactly like an index fund. This is because it is passively managed and aims to emulate the performance of the entire U.S. stock market.
The Schwab Total Stock Market Index Fund (SWTSX), on the other hand, in an index fund. It tracks the Dow Jones U.S. Total Stock Market Index. This index encapsulates more than 3,000 companies from large-cap to small-cap listed on U.S. stock exchanges.
Although these two funds are technically structured differently, they practically work exactly the same way. For us, as individual investors, the structure really only plays a very minor role. Much more important are things like the expenses ratio which actually have an impact on our return on investment.
Expense Ratio
For a mutual fund VTSAX has an extremely low expense ratio of just 0.04%. The average among mutual funds is somewhere around 0.75%. This means you’d pay $4 in fees for every $10,000 invested per year.
SWTSX has even lower fees than that: 0.03%. This resembles more closely the typical expense ratios of low-fee ETFs such as VTI. We will see later if this difference is really that significant in the long-term.
Issuer
VTSAX is issued by Vanguard. It’s probably no secret that I’m a fan. But for good reasons: Vanguard’s products are extremely low cost and high quality. Their ownership structure is unique and allows investors to become partners in The Vanguard Group. And in a way, Vanguard – and especially Jack Bogle – was the first to level the playing field for retails investors like us.
SWTSX was brought to market by Charles Schwab. Schwab is next to Vanguard one of the oldest and most trusted investment companies in the United States. They offer some excellent products as well, especially geared to retirement.
The key difference here is the ownership structure that Vanguard offers. I’ve also written an article highlighting the main reasons I believe Vanguard as a company to be superior to any other one out there.
Minimum Investment
When it comes to investing for the first time in VTSAX you might be surprised to encounter a $3,000 minimum investment requirement. This is due to VTSAX being a mutual fund and the associated costs per investor that come with the management of such. However, you could simply start investing in VTI in the meantime and then make the switch once your account reaches $3,000.
With SWTSX the minimum is basically the price of one share. Currently this will cost you around $50.
However, once the minimum threshold is reached you will be able to add money to VTSAX by multiples of just $1. So, if your portfolio is under $3,000 SWTSX is the better option here. After that you’ll get more out of your money with VTSAX.
Net Assets/Holdings
As one of the biggest mutual funds in the world, VTSAX manages around $134B. SWTSX’s holdings are dwarfed in comparison: $8.8B. But all in all, this does not really affect liquidity since both funds are tradable without problems at any given time.
The difference in the number of holdings is perhaps even more pronounced and might actually affect performance. VTSAX holds a whopping 3,600 securities while SWTSX just surpasses 3,000. This means VTSAX will more closely actually resemble the entire stock market than SWTSX.
Fund Composition
Let’s take a look at how these two funds are composed and what their distribution between large-cap, mid-cap and small-cap stocks is. Although differences here might be minute they can have effects on returns over longer periods.
VTSAX – Capitalization
Over three-quarters of all securities held my VTSAX are large-cap. Mid-cap and small-cap stocks together make up only around 25% of all the holdings.
This very much resembles the composition of the entire U.S. stock market.
SWTSX – Capitalization
The capitalization for SWTSX looks very similar: Slightly over 75% is made up of large-cap companies and remainder by small- and mid-cap.
The real difference here is the long tail of small-cap companies that are included in VTSAX’s 600 additional holdings. Because these companies are much smaller and the pie above is weighed by market-cap the difference only appears to be tiny: SWTSX is made up of 0.1% more large-cap stocks. Perhaps the 600 additional small stocks will lead VTSAX to eventually outperform SWTSX.
Industry Exposure
When composing your portfolio, exposure to various industries and diversification can play a big role when selecting your index funds (or in this case mutual/index funds). Generally, of course, these two funds will be exposed to pretty much the same industry as the mirror the entire market.
But let’s take a look if we spot some differences:
The biggest sector by far that VTSAX is exposed to is technology at around 22%. This is obviously right in line with the tech sector exposure of the entire market. The second biggest sector is healthcare followed by financial services. Basic materials, energy, and utilities combined make up together only around 6-7% of all holdings.
VTSAX also includes real estate and specifically real estate investment trusts or REITs.
As we would have expected the industry exposure for SWTSX looks about the same.
Even though VTSAX holds an additional 600 or so companies, the market cap of those is so small compared to all the large-cap stocks that they do not tilt the industry sector exposure in one or the other direction.
VTSAX vs. SWTSX – Analysis
Some metrics I always look at when comparing to similar funds is the volatility and max. drawdown. These can be indication for the funds performance during market downturns and in unstable economic circumstances.
| Metric | VTSAX | SWTSX |
| Volatility (monthly) | 4.44% | 4.40% |
| Volatility (annualized) | 15.39% | 15.23% |
| Downside Deviation (monthly) | 3.12% | 3.08% |
| Max. Drawdown | -50.84% | -50.20% |
| US Market Correlation | 1 | 1 |
Volatility
Here again, some slight differences become apparent: At 4.44% VTSAX is a little bit more volatile than SWTSX at 4.40% on a monthly basis. The effects of this increased volatility also extend to the drawdown range:
The maximum drawdown for the period from 2001 to 2020 peaked at -50.84% for VTSAX and -50.20% for SWTSX. This, of course, was the market crash of 2008/2009:
If you look very closely you can see the blue line peak out from under the red one at the bottom of 2009. Other than that the blue line representing VTSAX is almost exactly covered by SWTSX.
VTSAX vs. SWTSX – Performance
We have looked at difference in the built of both funds, compared their market capitalization and industry exposure, and analyzed some risk metrics. What does all of this tell us?
Do the subtle variances in the above metrics actually have an impact on the funds’ performance over time?
Annual Returns
Of course, this is the question that matters most to us as investors. So, let’s first have a look at the annual returns for both funds starting in 2001:
Overall the graphs look very homogenous. There are just a couple of things I would like to point out:
Pay close attention to the funds’ performance in economic downturns and crashes. VTSAX always seems to perform slightly worse during these times. This is most pronounced in the year 2002.
On the other hand, when looking at annual returns in economic boom times, VTSAX seems to come out ahead just ever so slightly: 2003 and 2009 especially. VTSAX seems to make up the extra losses in previous crises right away in the year after.
Portfolio Growth
Taking into account the differences pointed out above one could come to the conclusion that the 600 extra small companies make the fund just a tad more volatile. In the following chart I have illustrated the hypothetical growth of a $10,000 portfolio if invested in 2001.
But to be fair, just looking at the line above does not tell us much as the pretty much exactly overlap. The final amount, however, tells us more.
The investment in VTSAX would have been worth $34,611 today. Our investment in SWTSX, on the other hand, “just” $34,480. Thus, VTSAX comes out ahead by $131.
Conclusion
So, how can this be? The funds are almost exactly identical yet VTSAX is more volatile and still is able to achieve a higher return. The answer is simple: tax efficiency.
Tax efficiency is one of the hidden metrics in the world of investing because it is not directly accessibly by us retail investors. Furthermore, companies like to keep their precise tax-saving algorithms mostly to themselves.
But the results speak for themselves. Vanguard has managed to optimize their funds in a way to incur the absolute minimum of capital gains taxes. This is one of the reasons Vanguard still ranks number one among all other asset management firms.
Don’t get me wrong: if you have all your money in SWTSX, keep it there! There is no need to hastily switch funds because of my nerdy nitpicking of the smallest differences.
However, if you are still undecided between VTSAX vs. SWTSX, why not pick the fund with a slightly higher return?
Do you agree that VTSAX is the better fund here? Or are there some other advantages to SWTSX?
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Why does it say on your table that SWTSX is an ETF but the Schwab website says it’s a MF?
https://www.schwabassetmanagement.com/products/swtsx
SWTSX is a mutual fund, not an ETF.