VTSAX vs. VFIAX
Tae Kim

Tae Kim

VTSAX vs. VFIAX | Total Stock Market vs. S&P 500

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Two of Vanguard’s most popular investment products are the Vanguard Total Stock Market Index Fund, also known as VTSAX, and the Vanguard 500 Index Fund, also known as VFIAX.

In this post, we’ll deep dive into these two, so we can better understand the similarities, the differences, and which one might be the best investment option for you.

The world of investing is quite interesting.

Just when you think you have it figured out – for whatever reason, it gets more complicated.

Just look at index investing.

You think you have it figured out by recognizing that low-cost index investing is the way to go.

But just when you are about to invest your money, you are faced with additional options.

  • Do you invest in the S&P 500 Index?
  • Or the Total Stock Market Index?

And these are just two of the most popular ones.

There are literally hundreds of other index funds out there – International Index, Bond Index, Socially Responsible Index. The list goes on.

We won’t get into all the different types of index in this video, rather, we’ll focus on the two big ones. The S&P 500 and the Total Stock Market Index.

I know you want to make the best possible decision for your investment, so let’s get into understanding these two better.

S&P 500

Let’s start with S&P 500. The Standard & Poor’s 500. It’s actually the older of the two.

It was created in 1926 when it began tracking 90 stocks and in 1957, the list expanded to 500.

And for the past century, it has been the go to index to represent the stock market.

When you turn on any financial news, reporters are always discussing how the S&P 500 is up 50 points or down 100 points.

It essentially represents the 500 largest US corporations, weighted by the value of their market capitalization.

Because it’s weighted by market cap, though there are approximately 4,000 publicly traded companies in the United States total, these 500 stocks represent about 80 to 85% of the market value of all US stocks.

And weight within the index automatically adjusts based on the changing stock prices.

And to this day, the S&P 500 remains the standard to which professional mutual fund managers and investment firms compare their returns against.

Total Stock Market

Let’s now get a better understanding of the Total Stock Market Index.

In 1974, the Wilshire 5000 Total Market Index was established. A more comprehensive measure of the US Total Stock Market.

It includes around 4,000 companies including the 500 companies in the S&P 500 that we just discussed.

However, because the company stocks are also weighted by their market capitalization, the remaining 3,500 companies only account for about 15 to 20 percent of its total value.

And because it contains all the US stocks, it is often used as a benchmark for the entirety of the U.S. stock market and is widely regarded as the best single measure of the overall U.S. equity market.

Comparison | 4 Areas

Alright, now that you have a general understanding of these two indexes, let’s compare them.

We’ll look specifically at Vanguard’s VTSAX for The Total Stock Market Index and VFIAX for the S&P 500.

I’ll start with some simple ones such as Cost and Minimum Investment and we’ll get into the more debated items such as fund composition and returns.

1 – Cost

When it comes to cost, the main area we want to look at is the “expense ratio.”

A percentage of fee charged by Vanguard to manage this fund.

Vanguard is known for its low expense ratios and for both VTSAX and VFIAX it’s at 0.04%.

Great expense ratio. Especially when compared to actively managed funds that can charge anywhere between 0.5% to 2%.

But for our comparison’s sake, since these are identical, nothing to really see here.

2 – Minimum Investment

Moving onto minimum investment.

Same story here. Both funds have a minimum investment of $3,000.

If you don’t have $3,000 to invest, an VTSAX or VFIAX equivalent ETF, also known as Exchange Traded Funds could be a good option.

I review the differences between Index Funds and ETFs in this video here.

3 – Composition

Alright, let’s start getting into more of the fun stuff. Composition of these two funds.

Fundamentally, there are differences in what makes up the two funds because they are indexing different indexes.

VTSAX holds approximately 4,000 publicly traded companies. The S&P 500 holds the 500 largest publicly traded companies.

But because these holdings are weighted by the value of their market capitalization, on the whole, they are a lot more alike than different.

For example, you can see that the 10 largest holdings on both funds are identical.

And the percentage of total net assets of these 10 largest holdings aren’t too different. 26% for VTSAX vs. 31% for VFIAX.

In essence, though the number of companies between the two vary by thousands, because of market capitalization weight, VFIAX is about 80 to 85% of VTSAX.

Let’s take our understanding of composition a step further.

There’s a fancy term for how finance people categorize companies based on the size of their market value.

They are labeled:

  • Large Cap
  • Mid-Cap
  • Small-Cap

As the name implies, large cap is short for Large Market Capitalization and it refers to companies that are valued more than $10 billion. Mid-cap are companies valued between $2 billion and $10 billion and small-cap are companies valued between $300 million and $2 billion. Think of up-and-coming young companies that are growing fast.

Pretty much all the companies within VFIAX are large-cap companies. Established, large companies with market capitalization value of more than $10 billion. They are the big boys like Apple, Microsoft and Amazon that play large roles in our economy.

VTSAX on the other hand has all three represented in its portfolio. Large-cap. Mid-Cap and small cap. Of Course because of the weight given to market capitalization, the mid-cap and small cap only represent 10 to 15% of the total fund.

I know, it’s pretty dry stuff, but this mid-cap and small-cap companies will come into play later when I discuss when investing in VFIAX might be a better option for you over VTSAX.

4 – Returns

Alright, let’s get to the most important question you are probably thinking. Returns.

Is one going to make me more money than the other?

The Vanguard website provides return data that goes back to the year 2000, but I want to go back a little further.

The Center for Research in Security Prices at the University of Chicago has gone back to 1926 and has actually calculated the returns earned by all US stocks since.

Their data shows that the two indexes parallel one another with near precision.

When you look at the chart here. Comparing the Total Market vs. the S&P 500 between 1928 and 2006, you can hardly tell them apart.

It looks like one of my kids was trying to trace the lines but just missed it in a few areas.

According to this study, for the full period, the average annual return on the S&P 500 was 10.3% while the return on the Total Stock Market Index was 10.1%.

You must be saying – alright, I got it! The S&P 500 is better. That’s where I should be putting my money.

But before you close this browser, let me share with a few other interesting takeaways.

When we go back specifically to VTSAX vs VFIAX, and you compare the returns between 2000 to now, interestingly the total market, VTSAX has better returns than the S&P 500, VFIAX. 8.6% vs. 8.2%.

VTSAX
VFIAX

Alright, are you thinking about changing your mind? Maybe the Total Stock Market is better.

But wait, let me throw in another wrench in your decision.

Take a look at the 1 year return. VFIAX is a whopping 29% vs. VTSAX’s 26%.

Are you confused yet?

This represents what Jack Bogle calls a “period dependent outcome.”

Everything depends on the starting and the ending date.

Going back to our historical chart, if the comparison began in 1930 instead of 1926, the returns between the two would be identical, 9.9%.

The outcome really depends on which period we decide to look at. When you compare the past 20 years starting 2000, yes VTSAX has better returns – because small and mid cap companies performed better. But if you change the starting line to 10 years ago, 2011, VFIAX is better.

The bottom line is this.

The long-term correlation on the returns between the two indexes is 0.98. 1.0 is perfect correlation.

In the big picture of things, I personally think there is really little to choose between them.

When is S&P 500 Better For You?

However, I of course can’t leave you here. I do want to give you a rational scenario when selecting VFIAX over VTSAX could be a better option for you.

If you are the type that likes to slice and dice your portfolio into different classes, such as large-cap, mid-cap and small-cap, that I discussed earlier, the S&P 500 index fund gives you more flexibility over the total stock market fund.

When you select VTSAX, mid-cap and small-cap company representation is limited due to weight given to market capitalization. You may be the type that believes in small startups, so you want to hold more of those companies in your portfolio.

In that case you won’t be satisfied with the limited exposure to small-cap companies that VTSAX provides. Though there are thousands of small cap companies represented in VTSAX, they likely don’t make more than 5% of your total portfolio when you stick to VTSAX.

There have been times in history when small-cap and mid-cap companies have done a bit better than large-cap companies. And if you want greater exposure to these types of companies because you believe in them, VFIAX allows you greater flexibility to select your own allocation.

I’ll give an example of how this could work. Let’s say you want your exposure to small cap and mid cap companies to be more like 30% vs. the 15% that VTSAX provides. In that case, you can purchase VFIAX to represent 70% of your large cap equity holdings

Then hold separately, mid-cap and small cap funds like Vanguard’s small-cap index (VSMAX) and mid-cap index (VIMAX) to represent the other 30%.

And you can slice and dice your asset allocation any other way that you prefer based on your risk tolerance. There are literally hundreds of different studies out there regarding the ideal asset allocation. And they are also dependent on your risk tolerance.

We won’t have time to cover asset allocation in this video, but at the end of the day, VFIAX can provide you the flexibility you want if that is what you are looking for.

What I Prefer

Now if that went completely over your head, you might be more like me. Someone that prefers a simpler solution.

Personally, I prefer VTSAX. And I’m not saying this because I think it will get me better returns.

Remember, comparing the two, the returns were really period dependent. It’s hard to say which one will do better for the period that I’m investing in.

There are going to be periods in which the S&P 500 will do better because large-cap companies are really outperforming mid-cap to small-cap companies.

And there are going to be periods in which the total stock market will do better because small to mid-cap companies are going strong.

It’s hard to predict when this will happen.

So for me, I prefer VTSAX because it covers me across all scenarios with the added benefit of simplicity. Could I miss out on some returns because I didn’t have greater allocation of my portfolio to small cap companies? I’m sure there are scenarios. But for me, in this phase of my life, I prefer the simpler solution.

Sandwich Generation

As the Sandwich Generation, you have your hands full with so many obligations.

That’s why I prefer the simplest possible solution.

Despite how much I love reading about personal finance and investing, I don’t think I’ll choose spending my extra time on micro-analyzing asset allocation over spending more time with my family.

If the thought of choosing between VTSAX or VFIAX is tormenting you and is keeping you from investing. I would ask, don’t.

It’s almost like professional BodyBuilders who micro analyze the specific vegetable they are going to eat. Spinach or Kale?

Are there differences? I’m sure there is – I can’t tell you what.

For these guys who are trying to get their body fat percentage from 7.62% to 7.61% because they are trying to become the next Mr. Olympia, I give kudos to their micro analysis. It likely will make a difference.

However, for the rest of us, it really doesn’t matter if this spinach or kale will affect our body fat percentage by 0.01%. Rather our efforts should be focused on eating more healthy vegetables, reducing processed food and exercising more.

Pick one and invest as much as possible into the market. I personally like VTSAX, but if you like VFIAX, I 100% support you. You’ll win in the long run regardless of your choice here.

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