What is the best ETF index fund? There are so many ETFs to choose from, but which one would you choose? VOO vs VTI has been some of the top ones that so many people talk about. The great debate has started since these two funds have started.
You have the index fund that is older and tracks the S&P 500 in VOO, and then you have the index fund that tracks the whole market in VTI. With all the hype of both of them, which one would you choose? VOO vs VTI.
What is an index fund?
Before we start our great debate, let’s break down what an index fund truly is. Back in the day, 1976, John Bogle wanted to help the average Joe to invest.
There were multiple ways to invest already. Actively managed mutual funds was a go to for most people. These mutual funds had high expense ratios and fees charged by the financial institutions.
Bogle came up with a low-cost alternative called an index fund.
An index fund is a mutual fund that passively tracks a certain index. The big indexes that we have today would be the S&P 500 and even the Nasdaq 100 that tracks the top 100 tech companies.
The cool thing about these index funds is that it allows average Joes to be able to invest and match the returns of the market. On average, the S&P 500 has grown by 10% for the last 100 years.
Instead of investing in a mutual fund that claims they could beat the market plus charge you higher fees, you could be investing in a low-cost index fund.
For the majority of investors should be using low-cost index funds. It is the simple path to wealth.
What about day trading?
On average, over 80% of day traders lose money in their first year. In the second year, they are more likely to quit. The average win of a day trader is closer to -36%. While day trading seems quite exciting, and we hear stories of people making it big, most of the time it is just not the case.
Day traders often miss out on the biggest day gains in the market. If you stick with a strategy that is about buying and holding a low-cost index fund like VOO or VTI then you will come out of ahead.
Why VOO and VTI?
The reason I have picked these two index funds is to show you the most popular ones that people talk about.
VOO is the index fund that tracks the S&P 500 index. These are the 500 best and biggest companies in the U.S.A. These are companies like Apple, Walmart, and Coke Cola. Companies come in and out, but the S&P 500 is a good measure of the success of the U.S. stock market.
VTI is the index fund that tracks the total stock market index. They are all the publicly traded companies in the U.S. All of the S&P 500 companies are also in VTI. It is around 3,700 different companies.
VOO vs VTI in low-costs.
I talked about index funds having low-costs. Both VOO and VTI have an expense ratio of 0.03%. On a $10,000 investment, you will be paying $3. That is so minimal in the grand scheme of things.
ETFs ( Exchange traded Funds) like ARKK, by Cathie Wood, has an expense ratio of 0.75%. That is $75 for every $10,000.
That can really add up. On an $1,000,000 investment into ARKK will cost you $7500 every year. With VOO or VTI, the price will be $300.
Just with the cost alone, you have to make a choice. Will the returns be good enough to justify paying an extra $7200?
I believe in not chasing returns, but oftentimes the hype of certain funds can get people excited. Chasing returns is a loser’s game, and I prefer to stick with some low-cost index funds.
Tied: Both have an Expense Ratio of 0.03%
Diversification is a big thing for VOO and VTI
Diversification is everything. If you have one or two stocks and one goes belly up, well you are left with half of your investment.
VOO has about 500 companies in it, which gives it a pretty good level of diversification.
VTI has about 3700 companies in it, giving it a bit more diversification.
Just picking one of these funds you would be fine with diversification.
Let’s Break down VOO and VTI:
These may have some similarities and the price of each fund is the price of one share. At this moment the price of VOO is $378 and VTI is $214. These prices can change, but in the long run as the market continues to go up the prices go up as well.
I started buying VTI at around the price of $145 per share. Being brand new to investing, it seemed like a lot, but as the market has gone up so is the value of each share.
As you can tell the yields of both funds are quite similar and not much of a difference. The biggest difference between these two funds is the amount of stocks they hold in their fund.
VOO is with 500 different companies, and VTI has around 3700 different companies. If you were looking for diversification this is almost a no brainer looking at these numbers, but let’s really dive into these numbers.
The Numbers of Stock Holdings
The top 10 is exactly the same in both VOO and VTI.
VTI’s top 10 owns about 23.7% of the portfolio.
VOO’s top 10 owns about 28.9% of the portfolio.
Even though VTI has a higher amount of stocks within its fund, it still has a market cap that is weighted higher on the S&P 500 stocks.
This is basically a tie once again.
The investor influence:
Many investors will say one of these is their go to investment.
Warren Buffet, one of the greatest investors of all time, said
“consistently buy an S&P 500 low-cost index fund… I think it's the thing that makes the most sense practically all of the time.”
He even suggested that when he dies, to put 10% of his money into government bonds and 90% of the money into a low-cost index fund invested in the S&P 500. This would be the allocation he would want for his wife.
If Warren Buffet believes this highly in a fund like VOO then we should all take a listen.
There is also what J.L. Collins thinks as well. J.L. Collins is famous for writing The Simple Path to Wealth. He is blunt, to the point, and says owning a fund like VTI gives you international diversification and you have a piece of every company in the U.S.
The big guys weigh in. It is time for us to see how these two funds perform against each other.
Winner: VOO (Warren Buffet influence)
Performance of VOO vs VTI:
- 1 year: 56%
- 3 year: 16.74%
- 5 year: 16.27%
- 10 year: 13.87%
- 1 year: 62%
- 3 year: 17.14%
- 5 year: 16.67%
- 10 year: 13.79%
As you can see, they have relatively similar performance over the long term. The short term one fund will outperform another due to economic booms and corrections.
Tied: VOO for long term, VTI for short term
Advantages and Disadvantages of Owning VOO vs VTI
Pros of VOO:
- Warren Buffett suggests this
- It tracks the S&P 500 Index, which is averaging 10% annual return a year
- There is a higher yield for dividends
- There is a greater concentration of larger companies.
- The performance over the last 10 years has outperformed VTI slightly.
Cons of VOO:
- There is only 500 companies, which is less in diversification
- There is a criteria to get into the S&P 500.
- Up and coming companies may not get into yet.
Pros of VTI:
- J.L. Collins recommends this fund.
- Includes all publicly traded companies
- Includes up and coming companies like when Tesla was coming up or even Google.
- Broader exposure to mid and small cap stocks.
- The dividend growth has a longer history
- The performance over the last 5 years has outpaced the S&P 500.
Cons of VTI:
- 3000 of the stocks is very small percentage
- Lower dividend yield
Tied: Both have good advantages and disadvantages.
Invest Simply with M1 Finance. You can easily set up a portfolio with either VTI or VOO and automate everything. Make life simpler.
Which one should you choose?
It is always a good question when you are looking at different index funds and sees which one is better. Warren Buffett believes in the S&P 500 because it holds the top 500 companies in the U.S. stock market.
I personally like VTI. It gives a good amount of diversification. When an up-and-coming company is moving up in the stock market, you will already own it.
If you just had VOO instead of VTI, you may miss out on the rise of a company until it can make it into the S&P 500.
VOO will have the top 500 companies in the U.S.
It is up to you. You cannot go wrong with either one. Have fun, keep investing. If you want to take a look at two other funds. My other two favorite ones would be VTSAX vs FZROX. Take a look at these two and see what you think.
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I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.