ETF Comparison: VOO vs VTSAX

Continuing with our ETF and fund comparison series, let’s focus on two Vanguard products this time around: VOO and VTSAX. Both are popular broad market funds and they attempt to achieve the same thing but in two slightly different ways. Let’s try to find out which one does a better job.

It’s important to note one big difference up front: VTSAX is the Admiral Shares index tracker fund equivalent of Vanguard’s VTI ETF, whereas VOO is an ETF. I’ll dive in to the details below.

VOO vs VTSAX: A quick summary

Both funds have diversified exposure to various sectors to have a relatively balanced portfolio. Here’s a summary of what this article will further discuss:

• VOO is an ETF which tracks the S&P 500 index
• VTSAX is an index fund which tracks the CRSP US Total Market Index.
• VOO has 500 holdings compared to VTSAX’s 4,000 holdings, which are diversified across sectors and market capitalizations.
• Both funds have well-diversified holdings, but the Tech sector is naturally the most prominent exposure in both the funds.
• VOO has outperformed VTSAX in every period and this includes the last 1-year time frame where the market has declined quite a bit.
• Given the breadth and diversification of holdings in both funds, the biggest risk in both funds is simply the broader macroeconomic risk.
• VTSAX has a 40% greater AUM at $1.2 trillion.
• The dividend yield for VOO is 1.6% and for VTSAX is 1.54%.
• There is a difference in the trading liquidity as VOO is an ETF whereas VTSAX is an index fund, which means you can only trade it at the end of a trading day based on end-of-day pricing.

Index Funds vs ETFs

Before diving in any further, let’s address the one big issue up front: VOO is an ETF whereas the VTSAX is an index fund. Let’s take a quick look at the difference between these fund types:

• Index funds – An index fund is basically the love child of an ETF and a mutual fund. It is a passive or index tracking fund inside a mutual fund wrapper.
• ETFs (Exchange Traded Funds) – ETFs, like index funds, track an underlying index and trades freely on an exchange, like the NYSE or LSE.

From a practical perspective, the main difference between an ETF and an index fund is that an ETF can be traded actively on the market like any other stock. An index fund however is a mutual fund which means that it can only be traded based on end-of-day pricing.

For long-term investors either investment vehicle is fine as they both provide the same exposure, however the ETF provides higher liquidity. You can buy new holdings or sell all your existing holdings on the spot at any point during the trading hours.

People may choose ETFs over mutual funds for the fact that generally you can invest with smaller amounts as they usually have lower minimum investment demands. They are also generally cheaper to run so can have lower ongoing fees. They can be an easy first option for beginner investors, making the range of ETFs on Vanguard particularly appealing.

The table below shows the two funds along with their relevant ETF and Index fund pairing. In this case, both ETFs have an expense ratio of 0.03% and both index funds are at 0.04%.

Mandate and Underlying Index

Vanguard’s S&P 500 ETF (VOO) tracks the Standard & Poor’s 500 stock index, which is the gold standard for tracking a broad bucket of the largest and most successful and profitable companies in the US. The index consists of 500 largest companies in the US and is weighted by market capitalization. The goal of this fund is to track the overall returns of US companies.

Vanguard’s Total Stock Market Index Fund Admiral Shares, or VTSAX, tracks the CRSP US Total Market Index, so it’s a much more diversified fund with 4,000 holdings across sectors and market capitalizations. The objective of the index is to capture nearly 100% of the US investable equity market and it is market capitalization weighted. This means if you own VTSAX, you’re invested in almost every public company in the US which has a market capitalization of greater than $15 million and has a float of greater than 12.5% of shares outstanding.

As I have discussed in some of my other articles, CRSP is not as well known as the S&P, so I did have to do some further digging to learn more about them. It turns out CRSP is affiliated with the Chicago Booth School of Business, so it does have an impressive pedigree.

Holdings

By virtue of the differences in their benchmarks, VTSAX holds 8x more stocks than the VOO and has a smaller median market cap. But let’s dig further to get a better sense of what’s going on.

Sector Allocation

The allocations for the two funds are presented below. Note that as both funds use different benchmark providers, there’s a slight difference in how they classify the sectors.

S&P uses the Communication Services bucket which includes telecommunications companies and tech companies like Alphabet (Google), whereas CRSP strictly limits the Telecommunications bucket to telecom providers. CRSP classifies Alphabet as a Technology firm. Due to these difference in their classification, it becomes clear that the Technology sector is one of the largest sources of differentiation.

The only other two sectors worth of mention are Consumer Staples where VTSAX has an approximately 3.5% higher weighting, and in Industrials where it has a nearly 5% higher weighting.

Aside from those differences, which would total to around 10% of fund weight, the balance of the sectoral allocation is quite similar. Both funds are well diversified across US-based companies.

Top 10 Holdings

Let’s look at the top-10 holdings in each of the funds.

It’s pretty obvious here that the two funds are nearly the same here. Both have the same top-10 holdings, the only difference being that VOO is naturally more concentrated as it holds fewer companies.

Geographic Allocation

In the case of the VOO and VTSAX, both funds are exclusively invested in US-based companies. Note however that this does not mean these companies only generate their revenue in the US. Many of the companies in the S&P 500 are US-based multinationals and generate their earnings (and also have their operations) across the world.

In the S&P 500, and by extension in VOO, 61% of the revenues are generated domestically in the US. The balance comes from other countries such as China (7%), Japan (2.8%), UK (2.4%), and others.

The VTSAX is similar in that sense, but with slightly higher revenue exposure to the US of 63%. The distribution from the other countries is similar to the VOO otherwise.

The main reason why the VTSAX would have greater domestic exposure is because they include many smaller companies; and typically, these smaller companies would have a majority of their revenue from the US.

Market Capitalization

One last point to examine in this case is the difference in market capitalizations of the holdings as that is one of the biggest differentiation factors here.

As expected, VOO skews mostly to the large and mega cap sectors with 96% of the invested in companies that are $13B in market cap or larger. The VTSAX is marginally lower at 84%.

The balance is allocated to mainly mid-cap companies, with 4% spread across small and micro cap companies.

What I find funny here is that despite the VTSAX being a total market fund and holding more than 4,000 companies, nearly 87% of the holdings by weight are similar to the VOO which has only 500 companies.

This happens because the skew of market capitalization is so large that the large companies end up dominating the index. The smallest company in VTSAX has a market capitalization of $3 million, while the median is $619 million. As you may understand, it takes many companies of the median size to counter a single company like Apple which has a $2.4 trillion market cap!

Performance

VOO has consistently outperformed VTSAX over the last decade, with a meaningful difference. It’s however clear that the bulk of the outperformance came in the more recent years, where the large caps have heavily outperformed the smaller companies.

On a year-to-date basis (as Oct 31, 2022), the VTSAX also marginally underperformed the VTI: -18.76% compared to -17.71% respectively. While one may have expected the smaller companies to provide some downside protection, that does not seem to be the case.

There could be a number of reasons for this and the analysis and discussion of that would be far too technical for our purposes here.

It’s interesting to note that over 10 years, the performance is nearly the same. On a cumulative basis, that difference of 0.34% compounded over 10 years works out to just under 10% total. The VOO delivered 231.8% cumulative over 10 years whereas VTSAX delivered 221.9%. So you didn’t lose out on much if you held VTSAX over that period.

Dividend Yield

Neither of the funds is a large dividend payer. VOO has a 1.6% dividend yield (30-day SEC) as compared to 1.54% of VTSAX. Neither of these numbers is meaningful enough to have an impact on your decision-making. The funds are expecting to make their income primarily through an increase in asset price, than dividends.

As I mentioned in previous articles, you should always use expected total returns to drive your decision making. Prioritizing dividends could lead to a lower total return – which could be a very costly mistake for your portfolio.

For a graphic example of how much impact this can have, take a look at my comparison of the SPY vs SPYD. The SPY is SPDR’s ETF to track the S&P 500 ETF, which means the comparison is directly relevant for the VOO here. But it is sufficiently illustrative for the VTSAX as well!

Expense Ratios

VOO has an expense ratio of 0.03% while VTSAX has 0.04%. Both numbers are excellent and shouldn’t be used to discriminate between the funds. The average expense ratio is 0.1% in Vanguard funds, which is already better than the industry average. And these funds boast the best expense ratios of the lot.

The difference is negligible: On each $1,000 invested in the funds, you are looking at a difference in fees of $0.10. As you may appreciate this is irrelevant and can be safely ignored.

Fund Size & Liquidity

VOO has net assets of $266 billion for the share class (for the ETF), but has $748 billion in fund total net assets. Meanwhile VTSAX has net assets of $278 billion for the share class (for the mutual fund), but total fund net assets are 40% larger than that of the VOO at $1.2 trillion. It doesn’t matter how much money you’re looking to pour in, or how big a fish you are, you will not move the markets or influence the price. These two are very popular funds!

On liquidity, there is an important distinction which I highlighted earlier: VOO is an ETF whereas VTSAX is a mutual fund (or index fund). VOO can be easily bought and sold through your brokerage like any other stock. For the VTSAX though, you will have to place an order and the trade will only be executed at the end of the trading day based on the closing price for that day.

If you like the VTSAX, but want the liquidity of an ETF, you can go with the ETF-equivalent which is the VTI. You then have full liquidity and easy tradability just like the VOO.

Which is better VOO or VTSAX?

Both funds are good, but VOO is marginally better when it comes to raw returns. Both funds are meaningfully the same in most other aspects. Once again, the only point to highlight is that VOO will have greater trading liquidity than VTSAX. This is because the VOO is an ETF which trades freely on the NYSEArca exchange, whereas the VTSAX will only be traded at the end of the day.

Net of all factors, I believe the VOO is a clear winner here. If you do wish to own VTSAX but want the liquidity of an ETF, you can look at the VTI instead, which is the ETF version of the VTSAX.

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