You might choose to own both, but for a very specific reason.
Many investors subscribe to the idea of index investing, but figuring out which index fund they should own can leave them somewhat paralyzed.
Two common recommendations are the Vanguard Total Stock Market ETF (VTI -0.49%) and the Vanguard S&P 500 ETF (VOO -0.67%). Both Vanguard funds earn high marks from index investors thanks to their low expense ratios and strong track record of matching their respective indexes. Either could provide a great foundation for a portfolio.
Where they differ is in which index they track. The Total Stock Market fund tracks the CRSP US Total Market Index, which captures practically every investable U.S. stock in the market. The S&P 500 ETF tracks the S&P 500, which is a collection of about 500 of the largest U.S. companies that have been consistently profitable for at least a year.
Deciding between the two can be a challenge. So, here's what you need to know.
Image source: Getty Images.
There's a lot of overlap between the funds
Both funds are weighted by market capitalization. That means the biggest U.S. companies like Microsoft and Apple make up a significant share of both portfolios. Meanwhile, smaller companies, like numbers 491 through 500 in the S&P 500 make up a much smaller share. As a result, there's a lot of overlap between the Vanguard Total Stock Market ETF and the Vanguard S&P 500 ETF.
The top 10 holdings in each fund are the same. Here they are and their respective weightings.
| Stock | VOO Weight | VTI Weight |
|---|
| Microsoft | 7.08% | 6.12% |
| Apple | 5.63% | 4.93% |
| Nvidia | 5.05% | 4.2% |
| Amazon | 3.73% | 3.3% |
| Meta Platforms | 2.42% | 2.09% |
| Alphabet (Class A) | 2.01% | 1.74% |
| Berkshire Hathaway (Class B) | 1.73% | 1.46% |
| Alphabet (Class C) | 1.7% | 1.44% |
| Eli Lilly | 1.4% | 1.3% |
| Broadcom | 1.32% | 1.22% |
Data source: Vanguard. Data as of 3/31/2024.
Overall, 86% of the Total Stock Market ETF overlaps with the holdings in the S&P 500 ETF. As a result, the returns you can expect are very similar and highly correlated.
That leaves 14% of the Total Stock Market ETF invested in stocks outside of the S&P 500. These are mid- and small-cap stocks, or large companies that have yet to meet the profitability criteria for inclusion in the S&P 500 index. That amount of diversification is not insignificant, but it's not going to push the Total Stock Market ETF returns too far from the returns of the S&P 500 ETF.
Factors to consider for every ETF
There are some other important factors to consider, though. Let's take a look at them in the context of the Vanguard Total Stock Market ETF and the Vanguard S&P 500 ETF.
- Expense ratio: Expense ratio is the amount you'll pay as a percentage of assets to invest in a given fund. Most index funds offer very low expense ratios since there's no need to pay a fund manager to actively select individual stocks. Index funds simply respond to the market and the S&P selection committee. Both ETFs charge just 0.03% expense ratios.
- Turnover rate: Turnover rate is a measure of what percentage of assets a fund manager sells in a given year. A high turnover rate may indicate a poorly run index fund. Selling stock usually triggers a taxable event, but ETFs have a mechanism to avoid creating tax liabilities. Both ETFs had a turnover rate of just 2.2% in 2023.
- Tracking error: Tracking error measures how closely the price of the ETF reflects the value of the underlying index at any given time. A high tracking error can result in individual returns that don't match the promise of index funds -- that is, returns matching the market. If investors buy when an ETF is priced in excess of the index and sell when it's priced below the value of the index, they may end up costing themselves more than the expense ratio. The Vanguard S&P 500 ETF has managed a lower tracking error than the Vanguard Total Stock Market ETF: 0.02% vs 0.05%. But neither result is worrisome.
It might make sense to own both
You can't go wrong with either the Vanguard Total Stock Market ETF or the Vanguard S&P 500 ETF. Both offer very low expense ratios and turnover rates, and the difference in their tracking errors is negligible. The overlap in their holdings ensures that you'll get very similar returns going forward. The added exposure to mid- and small-cap companies through the Total Stock Market ETF does tilt its expected returns higher although that may take a very long time to play out.
If you want some added exposure to mid- and small-cap stocks, but not as much as the Vanguard Total Stock Market ETF provides, you could simply buy both. Splitting your money between the two evenly will put most of your investments in large-cap stocks, but around 7% in mid- and small-cap stocks outside the S&P 500. Although you can split your funds however you want. You may need to rebalance sometimes, but since the returns of each fund are so similar, you'll never stray too far from your target allocation.
At the end of the day, either or both funds can make a great cornerstone to your portfolio.
Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Total Stock Market ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
FAQs
10 Best-Performing Vanguard ETFs
| Ticker | Company | Performance (Year) |
|---|
| MGK | Vanguard Mega Cap Growth ETF | 32.53% |
| VONG | Vanguard Russell 1000 Growth Index ETF | 32.52% |
| VUG | Vanguard Growth ETF | 32.30% |
| VFH | Vanguard Financials ETF | 32.14% |
6 more rows5 days ago
The Vanguard Total Stock Market ETF is a compelling choice just because it boasts a slightly stronger long-term track record than the S&P 500, perhaps because it's exposed to faster-growing mid-caps and small-caps. The Vanguard fund also generally lags behind the performance of the Invesco QQQ Trust though.
What is the difference between Vanguard total stock market ETF and Vanguard S&P 500 ETF? ›
There's a lot of overlap between the funds
Meanwhile, smaller companies, like numbers 491 through 500 in the S&P 500 make up a much smaller share. As a result, there's a lot of overlap between the Vanguard Total Stock Market ETF and the Vanguard S&P 500 ETF. The top 10 holdings in each fund are the same.
Should I invest in ETF or S&P 500? ›
Key Takeaways. Dividend ETFs invest in high-yielding dividend stocks to maintain a stable, steady income. The S&P 500 is a broad-based index of large U.S. stocks, providing growth and diversification. The best choice for you will depend on whether you prefer income or growth from your investments.
What is the best-performing total stock market ETF? ›
The largest Total Market ETF is the Vanguard Total Stock Market ETF VTI with $392.03B in assets. In the last trailing year, the best-performing Total Market ETF was MTUL at 82.50%. The most recent ETF launched in the Total Market space was the JPMorgan Active Developing Markets Equity ETF JADE on 05/16/24.
What is the number 1 ETF to buy? ›
Top U.S. market-cap index ETFs
| Fund (ticker) | YTD performance | 5-year performance |
|---|
| Vanguard S&P 500 ETF (VOO) | 11.1 percent | 15.5 percent |
| SPDR S&P 500 ETF Trust (SPY) | 11.0 percent | 15.4 percent |
| iShares Core S&P 500 ETF (IVV) | 10.3 percent | 15.3 percent |
| Invesco QQQ Trust (QQQ) | 11.6 percent | 21.8 percent |
Vanguard Index Funds - Vanguard Total Stock Market ETF
You can become a millionaire with just four investments. That may sound too easy, but it's true. And you don't even need to think too hard about the investments you choose. Four Vanguard exchange-traded funds (ETFs) are enough.
Is it worth investing in S&P 500 Vanguard? ›
The Vanguard ETF has an expense ratio of just 0.03%, so you get to keep most of your gains. While there's no guarantee that the S&P 500 will achieve the same level of performance in the future, it has historically produced 9%-10% annualized returns over most multidecade periods.
Why would you choose Vtsax over VTI? ›
VTI vs VTSAX: Who Should Invest
Investors who prefer to trade during the day to take advantage of price fluctuations may prefer an ETF like VTI, whereas a more passive buy-and-hold investor may prefer a mutual fund like VTSAX.
Should I invest in more than one S&P 500 ETF? ›
You only need one S&P 500 ETF
You could be tempted to buy all three ETFs, but just one will do the trick. You won't get any additional diversification benefits (meaning the mix of various assets) because all three funds track the same 500 companies.
7 Best Vanguard Funds to Buy and Hold
| Vanguard Fund | Expense Ratio |
|---|
| Vanguard Total Stock Market ETF (ticker: VTI) | 0.03% |
| Vanguard S&P 500 ETF (VOO) | 0.03% |
| Vanguard Total International Stock ETF (VXUS) | 0.08% |
| Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) | 0.10% |
3 more rows15 hours ago
VTSAX is quite a bit more diversified than VFIAX as it maintains exposure to the total US stock market, whereas VFIAX only holds large-cap stocks that make up the S&P 500. Therefore, choosing between VTSAX and VFIAX depends on personal preference and investment goals.
Is it better to invest in total stock market or S&P 500? ›
For investors with small-cap exposure elsewhere in their portfolios, the large- and mid-cap S&P 500 fund may suffice. But for a broader, one-stop-shopping fund, the total market index offers maximum diversification within the U.S. equity universe.
Which ETF has the best 10-year return? ›
1. VanEck Semiconductor ETF
- 10-year return: 24.37%
- Assets under management: $10.9B.
- Expense ratio: 0.35%
- As of date: November 30, 2023.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
Which Vanguard fund has the highest return? ›
Top performing investment funds owned by Vanguard worldwide 2024, by one-year return. As of May 2024, the Vanguard Communication Services Index Fund provided the highest one-year return rate. The Vanguard Mega Cap Growth Index ranked second having a one-year return rate of 37.4 percent.
What is the highest performing ETF? ›
100 Highest 5 Year ETF Returns
| Symbol | Name | 5-Year Return |
|---|
| PSI | Invesco Semiconductors ETF | 23.83% |
| ITB | iShares U.S. Home Construction ETF | 23.78% |
| FBGX | UBS AG FI Enhanced Large Cap Growth ETN | 23.63% |
| XHB | SPDR S&P Homebuilders ETF | 21.97% |
93 more rowsVTI is a total U.S. market fund and holds more than 3,500 stocks. VTI is better diversified and benefits from small and mid-cap stocks that grow into large caps. VOO is less diversified, tracking the performance of the S&P 500 Index. VOO excludes small and mid-cap stocks.
What Vanguard funds have a 5 star rating? ›
The Vanguard Wellesley Income Admiral, the Vanguard Tax-Managed Balanced Fund Admiral, and the Vanguard High-Yield Tax-Exempt Fund are all popular vanguard funds.
