New to Investing? Let’s Compare VFIAX vs VTSAX!
This one’s for some of the soon-to-be, younger investors who have been asking me about how to invest in bigger companies like Apple and Amazon without actually buying Apple and Amazon. Let’s talk about how to get your hands on some of these mammoth stocks with VFIAX and VTSAX as another way to invest beyond the “top 500” as well as my insights about the two popular mutual funds.
Once you open an investing account, you’ll bump into the Vanguard Total Stock Market Index Fund (VTSAX) and the Vanguard 500 Index Fund (VFIAX) pretty quickly in your investing adventures because they are both extremely popular investment options. The two funds have a lot in common, but their “strategy” is pretty different.
VFIAX vs VTSAX: The Basics
Access is the big point of difference for VTSAX vs VFIAX. With VTSAX, you’re getting access to the entire U.S. equities market of more than 3,500 stocks. The breakdown is 3,128 smaller stocks with 509 of the biggest stocks. With VFIAX, you’re accessing just 509 of the largest companies in the United States. Think of it as owning chunks of only “the household names” with VFIAX. Ultimately, the differences make your decision one of prestige and establishment over variety!
VTSAX = Variety
(Vanguard Total Stock Market Index Fund)
Entire US equities market of over 3500 stocks
3,128 smaller stocks and 509 of the biggest stocks.
VFIAX = Establishment
(Vanguard 500 Index Fund)
Just 509 of the largest companies in the US.
It’s important to get the “gatekeeper” aspect of both VFIAX and VTSAX out of the way because investing for the first time can obviously be intimidating. Even if the gates ultimately do lock you out, you should still put the work in to learn as much about VFIAX vs VTSAX as possible because there’s a good chance that you’re going to be ready to “join the club” in just a little bit if you’ve been following my saving and investing strategies.
Now, you must be able to put down a minimum investment of $3,000 to get in with VFIAX and VTSAX. There’s also an expense ratio of 0.04 percent for both.
A Look at the Compositional Differences of VFIAX vs VTSAX
VFIAX is designed to essentially replicate the S&P 500 using a method that holds each component with the same weight as the index. VFIAX’s top sectors from strongest to weakest have consistently been:
- information technology (IT),
- healthcare,
- communication services,
- consumer discretionary and
- financials.
With VTSAX, you’re getting exposure to all of the small, mid-level and large-cap stocks within the U.S. equity market. With this easier, lower-cost point of entry comes a little bit more volatility with VTSAX than getting with the established, crowned stocks of VFIAX.
The biggest VTSAX vs VFIAX contrast point is simply the composition of stocks. It boils down to preferring the way VTSAX holds all publicly traded stocks versus the way VFIAX holds just the largest 509 stocks. I’ll cover what I’ve found composition to actually mean for outcomes in just a bit!
Things in Common in VTSAX vs VFIAX
When comparing VTSAX vs VFIAX, you’ll find that there’s quite a bit of uniformity in the big things. As I’ve covered, both have the same minimum investment requirement with an expense ratio of 0.04 percent. In addition, both VTSAX and VFIAX hold both growth and value stocks without a preference for either investing style. That means that you can easily plot at least a little bit of diversification with either option.
One of the surprising things about researching investment outcomes of VTSAX vs VFIAX is that there isn’t as much of a difference as you might expect. This has a lot to do with the market-cap-weighted aspects of both funds.
What you’ll find is that both funds offer what is essentially neck-and-neck performance over time. However, knowing which option goes in which direction is important for “bracing yourself for impact” in the shorter term.
Let’s crack open the numbers to do an apples-to-apples on VFIAX vs VTSAX. As of 2020, the average annual return for VFIAX is 10.53 % (5.44 % for Admiral Shares). That has VFIAX trailing the S&P 500 by just a trace. VTSAX shows an average annual return of 8.87 % (5.79 % for Admiral Shares).
Longer-term numbers aside, you will probably like one over the other based on your risk tolerance. VFIAX has historically experienced lower volatility than VTSAX. However, it also pushes out slightly lower returns for most newer investors. I consider it a “safe and low” option. By contrast, VTSAX has a little more volatility with slightly higher returns for newer investors.
When you factor in risk adjustment, VTSAX vs VFIAX really does still leave you in essentially the same place regardless of which one you prefer over the long-term.
What I Think Gives VTSAX a Bit of an Edge
What I like about VTSAX is that you can access small-cap stocks that I’d consider to be more “world-proof” than some of the stock powerhouses. That’s simply because most small-cap companies are focused on domestic happenings. As a result, you get a nice insulation or delay in regards to the impact of big, sweeping global policies and trade conditions. VFIAX’s reliance on large companies can make this seem like a riskier option in times of big global flux because your investments are going to get rocked by global trade matters.
What Should You Do?
Where should you come down on VFIAX vs VTSAX if you’re new to all of this? I like VTSAX for investors with moderate to high risk tolerance. With a focus on VTSAX, you’re getting very low-cost exposure to the entire stock market. This means getting in early on what you might call undiscovered gems.
If you’re looking for what might be called a “safer” long-term investment option, I like VFIAX for newer investors seeking the comfort and prestige of the large-cap market. If you believe Warren Buffet, you’re actually about to embark on the smartest investment strategy possible if you’re a new investor committing to VFIAX!
“Consistently buy an S&P 500 low-cost index fund,” Warren Buffett famously disclosed during a CNBC interview a couple years ago. “I think it’s the thing that makes the most sense practically all of the time.”
Buffet’s strategy rests on focusing on “bigger” companies instead of the “right” companies. One of the factors to really strengthen Buffett’s point for younger investors looking to sail toward an eventual retirement is that Vanguard’s fees of less than 1 percent are going to help pad your retirement with a lot more than other options.
I mostly agree with Buffet. However, I’ll add that people who lean toward VFIAX are going to need to make sure their portfolios are diversified enough to provide exposure in other ways to allow for growth. Your portfolio won’t be complete unless you pepper in some options for more aggressive growth.
By contrast, VTSAX could theoretically represent the entirety of your equity holdings. This is something to consider if you’re worried about management costs eating away at your investments from now until retirement. I also like the aspect of investing in companies you believe in with VTSAX’s variety.
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TL;DR – VFIAX vs VTSAX
- VFIAX and VTSAX are two huge funds that let newer investors get into the biggest companies
- Over time, both of these funds’ performance is almost the same
- VFIAX (representing 509 largest companies’ stocks) is more stable but offers slightly lower returns in the short-term.
- VTSAX (representing the entire market, including the largest stocks) is more volatile, but offers slightly higher returns for new investors.
- I have a slight preference towards VTSAX as it’s more growth-focused, and more insulated from global trade matters.
What’s your experience with VFIAX and VTSAX and the world of investing in general?
