The Vanguard Group is a company that offers mutual funds and other investment products. It has over $3 trillion in assets under management, making it the largest fund family in America. The goal of investing with them is to have low fees, high returns, and be diversified among different types of investments like stocks and bonds.
The “best vanguard index funds” is a question that many investors ask. There are many different types of Vanguard funds, so it can be difficult to find the best one. The “Vanguard Total Stock Market Index Fund Admiral Shares” is a good place to start for those looking for an all-in-one fund with low fees and tax efficiency.
VOO (Vanguard S&P 500 Index ETF) and VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) are two of Vanguard’s most popular funds. Each of these Vanguard funds:
- Is a tax-efficient investment
- Has a lower cost-to-income ratio than its competitors
- Is it a better investment than active funds with comparable investment goals?
Both of these Vanguard funds will be thoroughly examined in this essay. We’ll go through the following aspects of each fund:
- Investing priority
- Performance in comparison
- Investment holdings & size
- Turnover & tax impact in an investment portfolio
We’ll also guide you in the right direction for where an ordinary investor may buy these funds, as well as what to look out for while setting up your investing accounts.
There are, however, distinctions between each of these funds. First, although having similar cost ratios, one is a mutual fund and the other is an exchange-traded fund (ETF). They also have diverse investing goals.
We’ll start by understanding the distinctions between ETFs and mutual funds since VOO is an ETF and VTSAX is a mutual fund.
The distinctions between mutual funds and exchange-traded funds (ETFs)
Both ETFs and mutual funds are investment vehicles that provide individual investors a way to invest modest amounts of money into a wide variety of different assets. These assets might be bonds & CDs, equities, commodities, or other assets that an individual investor might not have access to without an investment broker.
Individual U.S. equities are the only component of VOO and VTSAX’s pooled assets. VOO invests in the 500 biggest U.S. firms, while VTSAX invests in the whole stock market of the United States.
Consider some of the fundamental distinctions between an ETF and a mutual fund.
The most significant distinction between mutual funds and ETFs is liquidity.
A manager oversees the management of mutual funds. Individual investors buy mutual fund shares from a reputable mutual fund firm.
The net asset value of these shares is another term for their worth (NAV). The NAV is determined by the sum of the underlying investments. Every day when the stock market closes, the NAV is determined.
The mutual fund management buys back the shares when an investor redeems a mutual fund. The transaction, however, does not complete until the exchanges have closed. The NAV is recalculated after market hours, and mutual fund shares are redeemed at the new NAV value.
ETFs are comparable to stocks in that they are exchanged on a stock market. ETFs may be purchased and sold at any time since they are traded on an exchange. The deal is completed instantly since the other party is another investor.
During regular times, this may not be a significant concern. When the stock market is volatile, though, it does matter. Particularly when extreme stock market fluctuations compel markets to shut during trade hours owing to massive selling.
During the early days of the coronavirus epidemic, for example, the whole US stock market shuttered many times in the midst of the trading day. ETF investors might sell their holdings more rapidly than mutual fund investors. As a consequence, most ETF investors saw less of a drop than their mutual fund counterparts.
Index funds, whether ETFs or mutual funds, may save you a lot of money on taxes. However, ETFs offer an advantage over mutual funds.
When a shareholder redeems mutual fund shares, the management must have sufficient cash to satisfy the redemption costs. In the event of a stock market panic, the fund manager may have to sell more equities to get cash. More capital gains may be generated as a result of the subsequent sales, which are passed on to the surviving owners.
When ETF investors sell their shares, however, another ETF investor purchases those shares. That implies no assets are being sold by a fund management in order to purchase ETF shares.
Trade execution differences
There are a few distinctions between ETF trading and mutual fund trades. Here are three ways ETFs vary from mutual funds in terms of trading.
The purchase minimums for ETFs vary.
An ETF’s minimum purchase is one share. Because ETFs are exchanged like stocks, they may be traded on almost any trading platform with little or no transaction costs. So, for the same price, an investor may purchase one share or 5000 shares of the same ETF.
A minimum initial commitment in dollars is normally required for mutual funds. When the minimum investment for new customers buying VTSAX at Vanguard is $3,000, for example. VTSAX shares may be purchased for less than $3,000 at Schwab. You would, however, be charged a $49 transaction fee each time. This renders that alternative too expensive.
Purchasing fractional shares of a mutual fund is more convenient.
When acquiring a certain dollar amount, most trading systems will enable you to acquire fractional shares of a mutual fund. Dollar-cost averaging is thus quite popular among mutual fund investors.
Those identical trading platforms, on the other hand, frequently demand you to purchase whole ETF shares. M1 Finance looks to be the only exception. Investors may invest in fractional shares with M1 Finance.
Finally, mutual funds are more widely accessible than ETFs.
ETFs aren’t frequently included in corporate retirement plans.
ETFs are unlikely to appear in a 401k or 403b plan since they involve the trading of whole shares. Their tax efficiency is mostly lost in tax-deferred accounts, to be honest.
However, mutual funds will be present. Frequently, various versions of the same mutual fund exist. This is due to the fact that they often exist in distinct share classes.
Share classes exist in mutual funds.
ETFs do not have a share class since they do not have a minimum investment.
A higher investment in a mutual fund, on the other hand, represents less risk for the fund management. As a consequence, mutual funds often provide a discount for greater investments. Lower expenditure ratios are the source of this price reduction.
Vanguard’s Core-Plus Bond Fund, for example, is available in two share classes: Investor and Admiral. With a $3,000 minimum investment, you may start with the Investor share class (VCPIX), however the fee ratio is 0.30 percent. Admiral shares (VCPAX) offer a reduced cost ratio of 0.20 percent, but they need a $50,000 minimum commitment.
Admiral shares, which are the fund’s single share class, have a $3,000 minimum investment.
Aside from share class differences, there may be expenses in a mutual fund that aren’t found in ETFs.
Transaction fees may apply to mutual funds.
Because ETFs are exchanged like stocks, they don’t have transaction costs.
However, transaction costs for mutual funds are mostly determined by who issuing the fund and how you are purchasing it.
There are no transaction expenses when you purchase a Vanguard mutual fund if you have a Vanguard account. If you purchase the identical Vanguard fund in your Schwab trading account, though, you’ll almost certainly pay transaction costs.
This is only for no-load money. No-load funds, such as Vanguard, are mutual funds that do not charge a commission. However, many funds impose loads, or charges, when you use their services.
- Purchase the fund’s shares.
- Sell the fund’s shares.
- Or both
However, mutual funds have an edge over ETFs when it comes to dollar cost averaging.
Let’s take a look at the Investing priority of these funds.
VOO’s Investing priority
VOO is a low-cost ETF whose investment objective is to track the Standard & Poor’s 500 Index. Both VOO purchases individual stocks from the S&P 500 Index in the proportions represented in the S&P 500 Index.
VOO focuses on replicating the S&P 500, not outperforming it. This leads us to wonder what exactly is the S&P 500 Index?
What is the S&P 500 Index?
The S&P 500 is one of the world’s oldest stock indices, and arguably one of the most famous. Created by Standard and Poor’s (now known as S&P Global) in 1957, the S&P 500 Index represents the 500 largest publicly traded U.S. companies.
As of the quarter ending 3/31/2022, the S&P 500 Index had 505 U.S. companies representing approximately $40.3 trillion in market capitalization. This represents about three-fourths of the U.S. stock market.
VOO owned individual stocks in 507 publicly listed U.S. firms as of February 28, 2022.
VTSAX’s Investing priority
Unlike VOO, VTSAX is an indexed mutual fund that follows a different stock market index. Instead of the S&P 500, VTSAX tracks the performance of the CRSP US Total Market Index.
What is the CRSP Total Market Index for the United States?
The Center for Research in Security Prices (CRSP) produced the CRSP U.S. Total Market Index (CRSP). CRSP is a world leader in high-quality historical market data and returns based on research. The CRSP’s depiction of the whole US stock market, including mega-cap, large-cap, mid-cap, and small-cap businesses, is the US Total Market Index.
The CRSP US Total Market Index contained 4,092 businesses as of the quarter ended March 31, 2022, representing roughly $45.3 trillion in market value.
VTSAX owned individual equities in roughly 4,124 publicly listed U.S. firms as of March 31, 2022.
The difference in Investing priority
It’s impossible to choose between VOO and VTSAX as the best index fund without considering the whole investing approach. In an investing portfolio, each of these low-cost index funds serves a distinct role.
Going strictly by the numbers, it appears that the S&P 500 represents about 12% of the total companies in the CRSP US Total Market Index. But the S&P 500 companies comprise almost 75% of the total market capitalization of the entire U.S. equity market.
VOO might be appealing to an investor who believes they already have enough small-cap exposure in their other assets. VOO may be chosen by that investor to concentrate on large-cap equities with some exposure to mid-cap firms at the index’s lower end.
VTSAX, on the other hand, would appeal to an investor who does not have any small-cap assets in their portfolio. That investor is most likely interested in investing in tiny caps. While there is some exposure to smaller businesses, the CRSP is still skewed toward the biggest.
Let us take a closer look at the possessions.
While the holdings of each of these funds are substantially the same, we should investigate them more. Let’s take a deeper look at each fund’s Top ten investments.
The Top Ten Holdings of VOO
Tech companies dominate The Top Ten Holdings of VOO with three exceptions. Berkshire Hathaway, the company managed by Warren Buffett, makes the top ten. So do two health care companies, Johnson & Johnson and UnitedHealth Group.
VOO’s Top ten investments account for little over 30% of its total net assets.
VOO Top Ten Holdings (3/31/22) is dominated by technology businesses.
VOO’s remaining 70% is allocated to the 490 or so remaining S&P 500 companies. Let’s look at VTSAX’s holdings in comparison.
Top Ten VTSAX Holdings
Top Ten VTSAX Holdings represent almost 25% of its entire market cap. As outlined in the picture below, the largest holdings are primarily from the technology sector, and are virtually identical to VOO’s top 10.
The Top ten investments of the VTSAX account for around 25% of its net assets.
Because the top 10 firms account for around 25% of VTSAX’s total assets, the remaining 75% is divided among 4,114 other companies.
Below is a Comparative analysis of the two funds.
|Fund||Top ten investments||The remaining number of businesses||Companies that remain ( percent )|
Comparative analysis of VTI’s and VOO biggest holdings as a percentage of total net assets
Let’s take a look at each fund’s total holdings, broken down by sector. The holdings of each fund are represented by a pie chart from its associated index. This should help with visualization.
VOO Holdings in General
Breakdown of the S&P 500 companies, by sector
In the S&P 500, the tech sector reigns supreme (28% of holdings), followed by health care (13.6%), consumer discretionary goods (12%), and financials (11%).
The CRSP representation below shows a minor variance, although it is essentially identical to the whole US stock market.
Overall Holdings VTSAX
Companies in the CRSP Total US Stock Market, broken down by sector
Technology businesses make up little over a quarter of the CRSP’s total industry representation. Consumer discretionary products (15.27 percent), health care (12.86 percent), and industrials follow closely behind (12.65 percent ).
Their holdings are fairly similar since Vanguard’s Total Stock Market ETF closely monitors the CRSP.
Although VTSAX provides slightly more diversification than VOO, it’s simply because the CRSP Total US Stock Index includes small cap companies. The S&P 500 focuses mostly on large cap companies.
Value vs. growth stocks
Each of these low-cost funds is an index fund. As a result, neither fund tries to achieve a slant towards growth or value. But because the S&P 500 and CRSP Total US Stock Market are both market cap weighted indices, you might find that these funds tilt slightly more towards large-cap growth rather than value stocks.
Let’s take a look at the overall assets managed (AUM).
Comparison of AUM
Vanguard index funds are among the most well-known in the world. Whether you’re talking about mutual funds or ETFs, their cheap costs make them quite appealing to long-term investors.
VTSAX and VOO are two of Vanguard’s biggest fund holdings since they monitor two of the most popular stock indexes. VTSAX has around $1.3 trillion in net assets, whereas VOO has $808 billion in net assets.
Let’s look at the performance of each fund, both compared to its benchmark index and in absolute terms.
Comparison of results
Both VTSAX and VOO are passive index funds before we get started. Their purpose is to keep track of their respective indexes’ results.
But these returns will always differ based on two factors: management fees & taxes.
Ratios of expenses
Also known as management fees, Ratios of expenses are taken from the investment (in both cases, Vanguard) to cover the operating costs of the fund. Usually, Ratios of expenses are reflected by an adjustment to the end of day share price.
An index fund has the benefit of not having to pay for an active fund manager, investment analysts, or other employees to oversee the investments. As a result, they may charge a relatively low cost ratio, making index funds an attractive option for many investors.
VTSAX has a 0.04 percent expenditure ratio, whereas VOO has a 0.03 percent cost ratio. Vanguard takes $4 (for VTSAX) or $3 (for VOO) each year for every $10,000 invested. For example, most financial advisers consider a fund to be inexpensive if its annual cost ratio is less than 1%.
Mutual funds and exchange-traded funds (ETFs) do engage in taxable events. Harvesting capital gains or getting dividends from the underlying firms are examples of taxable occurrences.
Because the corporations do not pay taxes on these occurrences, it is difficult to see how taxes affect yearly profits. The investor is informed about these transactions.
It’s difficult to observe in most investing accounts. However, you’ll most likely see quarterly dividend transactions for each mutual fund or ETF in your investment portfolio every quarter.
Dividends paid on taxable investment accounts are taxed. If your fund has a low dividend yield, the dividends in your investment account will most likely be taxed at a low rate. This might be qualified dividends (which are taxed at capital gains rates), ordinary dividends (which are taxed at regular income tax rates), or a mix of both.
Distributions of capital gains
And at the end of the year, towards the end of December, you’ll see Distributions of capital gains in each of your funds. The amount of distributions depends on the amount of activity in your fund.
If your fund has a high turnover rate, you’ll probably have a lot of Distributions of capital gains. High turnover means an active fund manager is consistently buying and selling underlying securities within the fund. Those capital gains are required to be passed on to the fundholder (that is you).
Index funds, on the other hand, see very little turnover. Each of these indicators is recalculated every year. The funds are also rebalanced on a quarterly basis. As a result, there isn’t much buying and selling going on. And this has a significant impact on performance.
Let’s take a look at the Performance in comparison of each fund (minus management fees), compared to its underlying index.
VOO vs. S&P 500 Index
This is the breakdown of VOO’s yearly investment performance for the last year, three years, five years, and throughout its lifetime as of 03/31/2022:
- 15.59 percent after one year
- 18.88 percent after three years
- 15.95 percent after 5 years
- 14.60 percent on a ten-year basis
- 15.33 percent since inception
Similarly, VOO’s performance slightly trails the S&P 500 Index, with Ratios of expenses presenting the primary difference.
Annual performance of VOO and the S&P 500 Index (Vanguard website)
It’s important to note that Vanguard also offers a mutual fund as an alternative to VOO. In fact, VFIAX, the Vanguard S&P 500 mutual fund, also happens to be the mutual fund industry’s first index fund.
CRSP Index vs. VTSAX
Here’s how VTSAX’s yearly investment performance has changed over the last year, three years, five years, a decade, and throughout its history:
- 11.67 percent after one year
- 18.15 percent after three years
- 15.36 percent after five years
- 14.24 percent after ten years
- 8.22% since its beginning
Based on its cost ratio drag, VTSAX’s performance falls marginally behind the target index.
VTSAX has averaged a yearly investment return of 8.22% since its launch in 2000. ‘Spliced entire stock market index,’ you’ll note. This merely reflects the fact that from its inception, VTSAX has tracked three distinct stock market indices:
- Until 2005, the Dow Jones U.S. Total Stock Market Index (previously the Wilshire 5000)
- US Broad Market Index (MSCI) (from 2005 until 2013)
- US Total Market Index CRSP (since 2013)
All three indexes represent the complete stock market in the United States.
VTSAX and the US Stock Market’s Annual Performance (Vanguard website)
The stock symbol VTI is used to trade an ETF that is similar to VTSAX.
Where You Can Purchase VOO & VTSAX
VTSAX and VOO may be purchased via practically any online brokerage business or your financial adviser.
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