VTSAX vs. VOO - Which Fund Is Better?

VTSAX vs. VOO – Which Fund Is Better?

Vanguard’s funds have been my go-to investment option ever since I seriously started investing for the long-term. Not only do they provide excellent funds with very expense ratios, but Vanguard’s company philosophy is also one to aspire to. However, I have never quite understood the difference between their Admiral Shares like VTSAX and regular exchange-traded funds like VOO. So, today we’re going to dive a bit deeper and explore the difference between VTSAX vs. VOO.

Which fund is better? Overall returns seem to favor VOO which outperforms VTSAX by a few percentage points. There are some advantages to VTSAX, however, which may outweigh the slightly worse performance: VTSAX holds a much larger number of securities than VOO. Furthermore, automated investing is easier to set up with VTSAX. On the other hand, VOO does not have a rather high minimum investment of $3,000 that is required for VTSAX.

Let’s look at all of these factors in a bit more detail!

VTSAX vs. VOO – Overview

This article will discuss some of the differences in make-up, risk, and performance of VTSAX vs. VOO. First, we’ll take a look at some of the key differences between the two, including their structure, expense ratio, and minimum investments. In a later section I’ll compare some risk metrics related to volatility and maximum drawdowns and we’ll conclude as usual with a comparison of annual returns and a backtested portfolio of $10,000.

VTSAX vs. VOO – What’s The Difference?

VTSAXVOO
NameVanguard Total Stock Market Index Fund Admiral SharesVanguard S&P 500 ETF
IndexS&P 500 Index
Expense Ratio0.04%0.03%
IssuerVanguardVanguard
StructureMutual FundETF
Minimum Investment$3,000Price of 1 Share
AUM$134B$133B

Index

The Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) does not track any index since it is structured as a mutual fund. This means that there is no underlying index. However, VTSAX holds essentially the same securities as VTI does – Vanguard’s Total Stock Market ETF. The number of holding for VTSAX is just slightly higher than VTI’s at around 4,000. It seeks to emulate the performance of the entire U.S. stock market.

The Vanguard S&P 500 ETF (VOO) tracks the S&P 500 Index. This index is probably the most well-known U.S. stock market index. It was created by Standard & Poor and tracks the top 500 biggest (by market cap) companies in the United States.

The real difference in the make-up between VTSAX and VOO thus comes from the fact that VTSAX includes a long tail of smaller U.S. companies (around 3,500 of them) which failed to make it into the top 500. This could have an impact, as we will see later on, on the fund’s performance during market downturns.

In terms of their market correlation both funds score a solid 1.0 meaning their performance correlates close to 100% to that of the entire U.S. stock market.

Expense Ratio

VTSAX has a slightly higher expenses ratio than VOO. While VTSAX is at 0.04%, VOO is able to offer probably one of the lowest expense ratios on the market on par with VTI and SCHB: 0.03%. This difference stems from the higher administrative costs that are associated with mutual funds. Plus having to manage about 3,500+ stocks in a fund can increase costs quite a bit.

However, both funds have very low fees compared to the rest of the market. Especially for a mutual fund, 0.04% is almost unheard of. Of course, a difference of 0.01% can make have an impact in the long-term but think of it this way: for every 1 million dollars you have invested, you would pay $100 per year more in fees.

Issuer

VTSAX and VOO are both issued by Vanguard, one of the most trusted investment management companies out there. Vanguard has some unique advantages over other issuers on the market in terms of their low expense ratios and ownership structure.

When investing in a Vanguard fund you basically also become a shareholder in The Vanguard Group, Inc. and thus a part owner. Any additional profit that is made after deducting expenses for managing the fund flows straight back into them. There are no third party investors taking a share of any of your investments.

Minimum Investment

If you decide to invest in VTSAX you will have to start with a minimum of $3,000. This may not be an issue for the established investor but it might pose some challenges if you’re new to the world of investing and just want to get you feet wet. Of course, you could opt for investing in VTI as long as your net assets are below the minimum and then convert those holdings into VTSAX once they exceed $3,000.

With VOO it is a bit more simple. All you need to start investing is the price of one share which currently is around $270. So if you can scrape together $270 from under your pillow you can invest in VOO.

This difference is not really significant if you think about the long term. A $3,000 minimum should keep you from potentially investing in a fund with better returns. It’s just something to keep in mind when starting out.

Net Assets

At $134 billion under management VTSAX is one of the largest mutual funds in the world. VOO’s assets under management are not too far off at around $133 billion. This makes VOO the third biggest fund worldwide:

 top 5 of the largest ETFs worldwide - VOO vs. VTSAX
Source

With funds of these dimensions liquidity and tradability obviously will not be an issue at all. This usually only affects ETF with a much smaller amount of net assets.

Fund Composition

In this section, we’ll take a look at how both funds are composed. We will see that there are some key differences between the ratio of large-cap to small-cap stocks in VTSAX and VOO.

VTSAX - Equity Market Capitalization

VTSAX – Equity Market Capitalization

As illustrated above VTSAX is comprised of more than three-quarters of large-cap stocks and 17.5% of mid-cap companies. This represents pretty much exactly the equity market capitalization of the entire U.S. stock market, which is exactly what you would want in a fund aiming to emulate that.

Small-cap companies make up a minority of less than 10%. Although the number of small-cap stocks may be far higher than large- and mid-cap stocks they only represent less than one-tenth of the fund’s total net assets.

VOO – Equity Market Capitalization

The make-up of VOO is rather different. As depicted above, small-cap companies are not included in the fund at all. This should be of no surprise since the index this fund tracks only includes the 500 largest companies by market cap. As a result, large-cap companies make up a whopping 88% of the fund’s composition, pushing mid-cap holdings down to only 12%.

Industry Exposure

The point I want to highlight in the eternal struggle between VTSAX and VOO is their difference in exposure to industry sectors. This can play a role if you are trying to balance your portfolio’s exposure to certain industries.

VTSAX vs. VOO – Industry Exposure

As it is with the entire U.S. market, technology stocks dominate VTSAX as well at more than 20%. This is followed not too closely by healthcare and financial services at around 16% and 14% respectively. The smallest exposure are basic materials energy and utilities.

REITs are included in this mutual fund so that you’ll have close to 5% of real estate exposure when investing in VTSAX.

VTSAX vs. VOO – Industry Exposure

VOO’s exposure looks rather similar to that of VTSAX: tech stocks dominate here as well and the second and third place goes to health care and financial services. The three sectors with the least exposure are basic materials, real estate, and energy.

Two differences do stand out from the above: 1) Real estate plays a bigger role in VTSAX and 2) consumer goods are less relevant in VOO.

This can lead us to believe that the long tail of 3,500 smaller companies that are included in VTSAX tend to shift towards those two industry sectors. Since the difference is rather small, it will be interesting to see if this actually has a significant impact on the funds overall performance and risk metrics.

VTSAX vs. VOO – Analysis

In this section, I’ll go over some of the most common risk metrics associated with both funds.

MetricVTSAXVOO
Volatility (monthly)3.95%3.79%
Volatility (annualized)13.69%13.13%
Downside Deviation (monthly)2.56%2.41%
Max. Drawdown-20.87%-19.58%
US Market Correlation11

Volatility

In terms of monthly volatility VOO appears to be quite a bit more stable than VTSAX. The difference between 3.95% and 3.79% may not seem like a lot but on a monthly basis a deviation of 0.16% can make a difference. This becomes apparent when looking at the annualized volatility of 13.69% for VTSAX and 13.13% for VOO.

The question is, whether the increased volatility of VTSAX actually affects the fund’s performance in economic downturns or stock market crashes. In other words: how protected are your assets when things go south.

The graphs below plot the maximum drawdown of each fund starting in 2011. It is unfortunate that there is not enough historical data available to compare both funds’ drawdowns during the stock market crash of 2008/2009 but this should nonetheless give us a pretty good idea:

VTSAX vs. VOO – Performance

While analyzing the variances in a fund’s built and comparing exposures to various industries can give us some factual insight into how VTSAX and VOO ought to behave, it’s rather difficult to deduce how a mutual fund or ETF will perform.

So, in this section we’ll look at some of the juicy details. First up: annual returns.

Annual Returns

VTSAX vs. VOO – Annual Returns

What is quite striking when looking at the above chart, is that there are not many years when VTSAX has actually outperformed VOO. The only ones seem to be 2012, 2013 and 2016, all of which were rather economically prosperous.

When looking at some years with negative overall market conditions it becomes clear that VOO tends to fare way better than VTSAX. The only real difference we know of between these funds is the exposure to small-cap stocks in VTSAX. Could it be that small-cap companies are responsible for the worse performance during recessions?

Portfolio Growth

The graph below will provide an even clearer picture. These are the accumulated returns since the inception of VOO for both funds. I have simulated a portfolio of $10,000 and back-tested VTSAX and VOO. This is the result:

VTSAX vs. VOO – Portfolio Growth

Today, VTSAX would be worth about $27,000 while a portfolio made up entirely of VOO would have a value of about $28,000. A difference of $1,000 or 2,8%!

So, if we have to answer the question based on this data: VTSAX vs. VOO – which fund is better? The winner is VOO.

Conclusion

We’ve looked at several differentiating factors between VTSAX and VOO. Starting with some key differences in their structure, minimum investments, volatility, and drawdowns, but what it seems to boil down to is this: VOO performs better over a time frame of the past 10 years.

Now, this result obviously comes with a huge caveat. 10 years is not a long time in the history of the stock market and only the next few decades will show if VOO will be able to keep its lead.

Overall, you will be well of investing in either one of these funds. If you prefer a little more exposure to small-cap securities and the benefits that come with automated investing, VTSAX is for you. If you’d rather place your trust in America’s top 500 performers and take the historical data for face-value, then VOO is the way to go!

Does the superior return of VOO outweigh some of the benefits of VTSAX? What do you think?

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