VTI vs VOO | Should You Invest in the Total Market or the S&P 500 Index?

Everyone knows I’m pro index funds, but people often ask which ones!? Today I’m going to share more specific secrets on what certain ETF, Exchange Traded Funds, can work best for you. I’m going to focus on only two ETFs; VTI vs VOO or Vanguard Total Stock Market ETF (VTI) and the Vanguard S&P 500 ETF (VOO) because they are the two mammoths of the industry!

I need you to understand the basic differences between the two and how they are likely to perform over time. This is extra important if you don’t plan on touching your investment over the next decade and just let it keep building.

Why VTI vs VOO?

When it comes to investing in index funds and specifically ETFs, Vanguard is the biggest name there is. Vanguard was started by Jack Boggle who was kind of the grand-daddy of index investing.

He famously had the saying, 

“Don’t look for the needle in the haystack. Just buy the haystack.”

Jack Boggle – founder of Vanguard

I love that saying. You save time by not looking for the gems and apparently, after decades of evidence, there is literally no downside to it!

But even when buying an index (or haystack), you still have to choose something, which index to buy into. There are different ones and VTI vs VOO is the biggest distinction, both in terms of assets under management but also philosophically

VTI = the 3 letters you type in to buy Vanguard Total Index
VOO = the 3 letters you type in to buy Vanguard S&P 500 Index (the ohs are zeros but whatever)

So let’s dive in!

Compositional differences in VTI vs VOO

VTI tracks all publically listed companies in the U.S. Presently there are 3,566 companies in VTI. VOO tracks the top 500 listed companies in the U.S and is intended to track the S&P 500 Index.

Both funds are “market-cap weighted” representations of the market. Essentially, the bigger a company is the more weight they carry in the index. VTI has that weight for EVERY company and VOO has that weight for just the top 500. As a result, both indexes usually have the same top holdings. 

There is an exception though. The S&P 500, and thus VOO, has some magical counsel that oversees who gets to be in the club and sometimes they won’t let one of the 500 biggest companies in. So the only time the top 500 holdings may be different in VOO vs VTI is when a company starts getting big enough to be in the top 500 but hasn’t yet been approved to be a part of the club, meaning it doesn’t get into VOO. 

A perfect example of this, Tesla, they are big enough, but haven’t been stable enough to get the honor of joining. 

The magical counsel’s existence means you get only vetted stable companies in the S&P 500 but you also miss out on the up and comers’ rise to glory

And while they both share the market-cap weight, one fun fact is that the largest companies contribute more to the index. If the biggest stock in these indexes, Apple, increases by 1% in a day, that will likely have a bigger impact than the smallest stock, increasing by 10%. So even though you are buying LOTS of companies, you are really mostly buying the big ones.

Philosophical differences in VOO vs VTI

So why bother having the two choices? 

VTI looks to invest in the entire market regardless of the size of the company. No screening, no selection, nothing. So VTI includes companies that have a small market capitalization – small cap, medium cap, or large-cap. 

However VOO looks to only include the largest 500 stable companies, the large cap stocks. The narrative from the S&P 500 counsel (and thus VOO) is that larger companies are generally better because they are better-capitalized, better-financed and are likely to be more geographically diversified when they sell their goods or services around the world.

Really, when you add it all up, although VTI does offer more diversity, the overall impact is minimal as the largest holdings are the same, and things are market cap weighted so the big boys represent the majority of the holdings.

What does history say about VTI vs VOO?

The real difference in performance in VTI vs VOO is pretty minimal and is seen throughout history.

The average return over the past 10 years between the two is really just off by under 0.5%. VOO is always on the upside over the past decade but really, it’s small enough that I’m not going to sweat it.

Especially when you look at 2 decades of data which makes VTI the better performer by a small margin (see the chart at the end) instead of VOO being the winner like the last 10 years.

But wait! Best Performers Don’t Repeat

Nothing lasts forever… 

The last decade and half has been all about growth stocks, companies that have a great product or service. Lately, these have been tech companies that have come to dominate as the biggest names. Think Apple with the iPhone, or Google, or Netflix and Facebook.

But the best performers over a decade don’t tend to repeat that feat in the next decade. I’m not saying that everyone automatically shifts focus to VTI’s smaller companies. However, innovators are always starting new companies that become the engine of growth in the future. Remember the ‘90s, everyone was buying Dells and Gateway Computers and getting on the internet for the first time with AOL. 

Top performing companies – all graphs from visual capitalist

Then, those were the best performers. In the ‘00s, it was the banks and homebuilders because of the real estate craze and the oil stocks out of fear that we may not have enough oil.

Tech companies have really dominated the markets in the past decade. Facebook, Apple, Netflix and Google, aka FANGs, became a famous acronym as they drove most of the gains in the markets.

Another reason for these shifts is that industries’ own success contributes to their downfall. Think how well banks, mortgage lenders, and homebuilders were doing in the early 00’s because of the housing bubble and how badly they’ve performed over the last decade. There’s no guarantee and it may not be the same thing, but big-tech has become monopolistic and the Department of Justice just filed an antitrust lawsuit against Google recently. 

Are these really big companies, with over a trillion dollars in market cap still going to keep increasing in value when the government is prying around? Probably not.

Meanwhile, Tesla, one of the fastest growing companies ever, is not a part of VOO because S&P Global hasn’t yet included it in the S&P 500 Index special club. Nor is Zoom but both are a part of VTI. 

So what does all that mean?

When it comes to VTI vs VOO VTI makes sense if you believe in small-cap and mid-cap stocks are likely to perform better in the coming years. Clearly with a much larger pool of stocks in the VTI, this index stands to benefit if smaller and mid-sized businesses are likely to perform better. 

Also based on the concept of yesterday’s winners are tomorrow’s losers, VTI seems like its time is due.

But on the other hand, if a stock is underperforming from something like COVID life, it won’t be long before it gets removed from the VOO fund. However, it would remain a dead weight on VTI for a lot longer. Unless it goes bankrupt or gets acquired, poor performers will be part of the VTI portfolio for some time as it sinks it’s way to insolvency. 

What do I do?

At house FIREescape we spend long nights debating VOO vs VTI. 

… NOT.

In any case, the idea behind VTI is a good one and one that has worked over several decades; the current small or mid-sized companies will eventually grow and become the large caps of tomorrow. As a result, long-term returns for VTI seem better to me.

Also on a principle-level, I dislike the idea that there is a counsel which does or doesn’t let people into the club. It’s a small step from stock picking, which is a spiral I don’t want to go down. 

Really, it feels like an outdated concept that won’t keep up with the super techy, everyone-is-remote, grow-big-sell-out culture of today’s companies. I get that it is more of a feeling than real finance but I can make that choice because either way index investing is for the long-haul. Whatever you choose in the VOO vs VTI battle, it’s probably a good choice as long as you stick with it. 

Read more about investing and how to choose the best trading platform

TL;DR VOO vs VTI

  • VTI is an index representing ALL publicly traded companies in US, and VOO is the top 500
  • Historically, their performance has been nearly identical. 
  • VOO also has a vetting process that excludes “unstable” companies but that means fast-growing stocks like Tesla and Zoom are off the list.  
  • The inclusion of up-and-coming tech giants is why I lean towards VTI for the long-haul in the VOO vs VTI battle. 

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