Deciding between two exchange-traded funds can be tricky, especially when the top 10 holdings are identical, as are their expense ratios, and their performances and yield track very closely.
That describes two of Vanguard’s most popular ETFs, the Vanguard S&P 500 ETF (ticker: VOO) and the Vanguard Total Stock Market ETF (VTI).
[Sign up for stock news with our Invested newsletter.]
So why choose one over the other? Here are some considerations:
— What’s the difference between VTI and VOO?
— Massive overlap between VTI and VOO.
— Unique traits of VTI.
— VTI vs. VOO performance.
— Avoiding the performance trap.
What’s the Difference Between VTI and VOO?
VTI aims to measure performance of the CRSP U.S. Total Market Index, composed of large-, mid- and small-cap stocks, diversified across value and growth.
VOO, meanwhile, tracks only the S&P 500 index of large U.S. stocks.
Both are market-cap weighted, so the same stocks drive performance of both. The most heavily weighted positions in both are Nvidia Corp. (NVDA), Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN) and Alphabet Inc. Class A (GOOGL).
But VTI holds 3,531 stocks, a sign of the universe of midsize and small stocks in its underlying index.
“VTI contains VOO plus the rest of the U.S. stock market,” says Cristina Guglielmetti, a certified financial planner (CFP) and owner of Future Perfect Planning in Brooklyn, New York.
“Generally, I advise against trying to predict what’s going to out- or underperform and maintain a fully diversified portfolio that you can stick with over time,” she says, adding that non-U.S. stocks should also be included.
“This year, value stocks, small caps and international stocks are all doing well, but that wasn’t necessarily predictable, you don’t want to miss out on anything, and we won’t know when the next shift is going to occur,” she says.
Massive Overlap Between VTI and VOO
The reason to diversify a portfolio is to let different types of investments, or asset classes, take the lead while others lag. This means always owning the best-performing assets. If your funds hold the same stocks, they all move in the same direction at the same time, eliminating the benefits of diversification.
The overlap of stocks held in both VTI and VOO is more significant than investors may realize.
“The overlap is huge. About 85% of VTI is the same stocks as VOO, because both weight companies by size and the S&P 500 already makes up most of the U.S. market’s value,” says Christopher Cardinal, president and investment advisor at Cardinal Wealth Management in McKinney, Texas.
That leaves only 15% of the stocks in VTI that are not in VOO. And that’s less a question of risk than of investment philosophy, Cardinal says. “VTI is a bet on the whole U.S. market, whatever leads next. VOO is a slightly more concentrated bet on the established giants,” he says.
However, owning both won’t really help an investor, even if it seems like adding diversification. “You’re just buying the same mega-caps twice,” Cardinal says.
[See: The Best Mid-Cap ETFs to Buy.]
Unique Traits of VTI
The mechanics of a fund contribute to its performance. Cardinal points out a distinct feature of VTI that may give it a small edge. “All those smaller holdings generate more securities-lending income, which helps it track its index a touch more tightly,” he says.
In addition, VTI’s inclusion of smaller stocks may offer an advantage.
“VTI allows future winners to enter the portfolio before they become large enough for the S&P 500,” says Emilio Cabuto, CFP, a financial advisor at Verus Capital Partners in San Diego.
Despite the overlap between the large caps that dominate both funds, there’s somewhat less concentration risk with VTI, Cabuto says.
“The distinction lives in the remaining slice: VTI’s approximately 3,000 additional mid-, small- and micro-caps, and a somewhat less top-heavy profile,” he notes, adding that the top 10 holdings account for about 32% of assets in VTI as opposed to about 38% for VOO.
VTI vs. VOO Performance
As for the actual performance of each ETF, here’s a look at how they’ve done over trailing one-, three-, five- and 10-year periods. Performance is annualized and returns are through June 30:
| Fund | 1-year | 3-year | 5-year | 10-year |
| VTI | 23.2% | 20.4% | 12.2% | 15.0% |
| VOO | 22.3% | 20.6% | 13.4% | 15.5% |
As you can see, the two funds have posted remarkably similar returns, although VOO’s more concentrated portfolio of S&P 500 stocks has outperformed VTI’s total U.S. market strategy over longer periods of time.
Avoiding the Performance Trap
Investors often gravitate toward funds that have been outpacing others, but that’s not a reason to choose one of these ETFs over the other. “Choosing based on recent performance risks chasing returns instead of building a solid portfolio,” says Joshua Brooks, CFP, founder of Exponential Advisors in Weatherford, Texas. “You cannot time the market.”
Cabuto leans toward VTI, but not for reasons of performance. “The case for VTI was never that it wins every year; it’s that investors don’t have to predict which segment of the market leads next,” he says. “With identical 0.03% expense ratios and dividend yields both around 1%, the cost of that optionality is essentially zero.”
Rather than framing the question as VOO versus VTI, Guglielmetti says investors could consider how to best own all the assets they need in a particular account.
“For larger accounts and taxable accounts, there’s a benefit to having the individual asset-class ETFs,” she says. That could mean owning large caps through VOO as well as funds holding small- and mid-cap U.S. stocks, international developed markets and emerging markets to more easily manage exposure and harvest either losses or gains.
“For smaller or tax-advantaged accounts, using the all-in-one ETFs can make a lot of sense,” she says.
More from U.S. News
QQQ vs. QQQM: What’s the Difference?
GOOG vs. GOOGL: Why 2 Classes of Alphabet Stock?
What Is the Safest Investment With the Highest Return?
VTI vs. VOO: Which Has Better Performance? originally appeared on usnews.com
