Throughout the history of mutual funds and that of their younger cousins, exchange-traded funds, they have represented one thing above all else: diversification. Mutual funds and ETFs offer the possibility to invest across vast swathes of the market with the ease of buying only a single instrument. Two of Vanguard’s most popular ETFs, VT and VTI, take this concept to perhaps its furthest degree.
Each of these funds offers a cheap and tax-efficient way for investors to buy a small portion of an entire market. The allure of holding the stability of a whole global economy mixed with the potential that builds within is a powerful blend that can offer something to practically any investor. But when comparing VT vs. VTI, which ETF better fits your portfolio?
Passive Investing With Vanguard ETFs
Both funds in question are managed by Vanguard, a global leader in mutual funds and ETFs of all sorts. In particular, investors flock to Vanguard for its sensible, low-cost, passively managed index fund offerings – and they do so for good reason.
Vanguard founder Jack Bogle, widely regarded as a pioneer in consumer investing, is also credited as the creator of index investing. He launched the Vanguard 500 Fund, the world’s first index fund, nearly 50 years ago, paving the way for modern index ETFs.
Bogle’s philosophy, and Vanguard’s by extension, has always been to offer low-cost, reliable offerings that prioritize investor growth over fees, commissions, and high-paid fund managers.
Today, Vanguard is home to a large stable of passively managed mutual funds and ETFs which seek to uphold the classic tenet from Bogle himself: “Don't look for the needle in the haystack. Just buy the haystack!”
Vanguard Total World Stock (VT) Overview
The Vanguard Total World Stock ETF, or VT, is a passively managed ETF that gives investors exposure to a bit of everything.
VT tracks the FTSE Global All Cap Index, a massive index of over 9,000 companies. As the name implies, it is an index covering the US and many international markets, both well-established ones and those still developing. It also covers companies of all sizes, ranging from large-cap to small-cap.
As is generally the case with international investing, VT has higher volatility than a fund dealing exclusively in US securities. The variety of economies and markets it tracks can lead to more dramatic swings and the potential for greater long-term growth.
Vanguard Total Stock Market (VTI) Overview
A household name in index investing, The Vanguard Total Stock Market ETF (VTI) is a powerhouse among passive investors.
VTI tracks its holdings against the CRSP US Total Market Index, which contains over 4,000 companies and represents nearly the entire US investable equity market. As such, VTI invests in companies of every size and description, offering a level of diversification unavailable to most investors without the use of such a fund.
Well-known for its low fees, diverse portfolio, and embodiment of Bogle’s lifelong common sense approach to investing, VTI is a favorite among cost-conscious long-term investors. Along with its traditional mutual fund cousin, VTSAX, VTI is a common choice for investors building a “core four” portfolio. In more extreme cases, some investors consider the reliability and stability of VTI sufficient to use it as a one-stop shop for their entire portfolio.
VT vs VTI Portfolio Comparison
Both ETFs offer massive diversification along with Vanguard’s signature low-fee, low-tax, low-hassle approach. Further, since they track similar indices and have the same management styles, the likenesses go on from there. However, the makeup of each portfolio is the crucial point where the two funds diverge.
To many, VTI perfectly encapsulates Bogle’s “buy the haystack” philosophy. In the same way that indexes like the S&P 500 aim to represent the US stock market, the US Total Market Index goes a step further by including almost every company in that market. With this strategy, funds like VTI can blend the reliability of large-cap, blue-chip US companies with some of the considerable upside potential of up-and-coming companies and market sectors.
VT follows the same philosophy and takes it a step further by adding another dimension of diversification: global markets. It invests in companies of all sizes and all sectors in (potentially) all markets worldwide. Wherever there is growth or income to pursue in public equities, VT is most likely investing in it.
VT vs VTI Performance
So, we have two funds from the same issuer with different approaches to a similar philosophy. One seeks to match the gains of the entire US stock market, while the other goes abroad seeking greater opportunities with the same type of diversification. But when it comes down to track record, which of these Vanguard ETFs has offered its investors the best returns?
Let’s compare the market price growth of the two funds over a 10-year lookback (as of 8/31/23):
So, while recent performance is quite close in a side-by-side matchup, VTI still significantly outperformed VT over the past year. And as you zoom out to the past decade, the performance gap becomes far more dramatic in favor of VTI.
While recent history has heavily favored the US-based fund over its global counterpart, it is never the wrong time to remind oneself that past performance does not indicate future results.
Historical performance is one metric worth considering in the VT vs VTI head-to-head, but it does not make up the whole story alone. Remember, VT is a global fund investing in higher-risk markets than the US. As a result, it may yield disappointing returns or outsized gains in any given year.
Fees and Expenses
Ask any investor the most critical factors in index investing, and they will likely list low fees among their top reasons for buying into passively managed funds. Reducing overhead – including transaction fees, administrative costs, and tax burden – is a significant component of what makes index investing so potentially profitable. As such, low fees should always be a factor when choosing the best fund.
VT offers a miniscule expense ratio of 0.07%, a tiny fraction of the costs of a typical actively managed mutual fund. That means that every $1,000 invested in VT would incur less than $1 in yearly fees.
However, VTI has a significant edge here, with its best-in-class expense ratio of just 0.03%. This fund consistently carries one of the lowest expense ratios available for any ETF on the market. So, while VTI decidedly outshines VT in this regard, it also does so to nearly every mutual fund and ETF available, so we can probably cut VT some slack with its still remarkably low expenses.
How much an initial investment in an ETF costs may not be the most critical deciding factor for many investors. Still, available liquidity can be a crucial constraint and limit some investors from getting started with their otherwise top-choice fund. So, is there a difference in minimum investment in these two Vanguard funds?
Fortunately, as ETFs rather than traditional mutual funds, VT and VTI have a low barrier to entry. Typically, the minimum investment in an ETF is the price of a single share, though the rules may vary depending on your broker.
As of this writing, the share prices are around $93 for VT and $212 for VTI, well below the $3,000 minimum investment for some of Vanguard’s traditional mutual funds. Like the fees within both funds, the cost of investing in each is relatively low.
There is even better news for investors looking to buy either of these funds directly through Vanguard. The fund issuer now allows investors to purchase fractional shares of its ETFs, with a minimum of just $1. In other words, however much you’re willing to invest in these funds, be it $5 or $5,000, you have everything you need to make your first investment.
Choosing Between VT and VTI for Your Portfolio
The search for broad, low-cost index funds with significant diversification brings countless investors to Vanguard’s doorstep. Many of these investors subsequently arrive at a familiar fork in the road between two of their biggest and broadest index ETFs: VT and VTI.
Both funds offer incredible diversification that balances market-wide stability with the opportunity for significant growth, but which is right for you? With minimal expenses and excellent track records, either fund could make a solid addition to any portfolio. The difference primarily comes down to investor preference. Would you rather the familiar dependability of the US equities market, or should you mix in a bit of the international community, introducing a bit of risk in exchange for the possibility of outsized gains?
Whichever fund you decide is the best fit for your investing goals, you can count on an investing vehicle with a commitment to long-term growth, security, and costs that make sense.
More Articles From The Frugal Expat
Sam is the founder of the personal finance and self-improvement blog Smarter and Harder. His mission is to start exciting new conversations that empower people to improve their work, lives, and money, and hopefully have a fantastic time doing it. In all things, he strives to lead with positivity, understanding, and more than a bit of enthusiasm.