Exchange-traded funds (ETFs) have become increasingly popular among investors seeking low-cost, diversified exposure to the stock market. Two of the most widely recognized ETFs are Vanguard's VOO and VTI. In this article, we'll compare these funds, exploring their characteristics, performance, and suitability for different investment strategies.
What is VOO (Vanguard S&P 500 ETF)?
VOO, or the Vanguard S&P 500 ETF, tracks the S&P 500 index, which represents 500 of the largest U.S. companies by market capitalization. With an extremely low expense ratio of 0.03%, VOO offers cost-effective exposure to the core of the U.S. stock market. The fund holds 507 stocks, slightly more than the index it tracks due to some companies having multiple share classes.
What is VTI (Vanguard Total Stock Market ETF)?
VTI, or the Vanguard Total Stock Market ETF, aims to replicate the performance of the CRSP US Total Market Index. This index is more comprehensive than the S&P 500, encompassing nearly every publicly traded U.S. company. VTI holds over 3,500 stocks, including large-, mid-, and small-cap companies. Like VOO, VTI boasts an impressively low expense ratio of 0.03%.
Comparing the Funds
Market Coverage
The primary difference between VOO and VTI lies in their market coverage. VOO focuses on large-cap stocks, while VTI includes large-, mid-, and small-cap companies. This means VTI offers greater diversification across the entire U.S. stock market.
Performance and Risk
Historically, VOO and VTI have shown similar performance, with VOO slightly outperforming in some periods due to the strong performance of large-cap stocks. However, VTI's broader market exposure can potentially capture gains from smaller companies that may outperform in certain market conditions.
Investor Suitability
VOO may be more suitable for investors seeking exposure to blue-chip companies and those who believe large-cap stocks will outperform. VTI, on the other hand, might appeal to investors looking for comprehensive market coverage and those who want to capture potential gains from smaller, growing companies.
Pros and Cons of VOO
Pros: VOO offers focused exposure to large-cap U.S. stocks, which tend to be more stable and less volatile than smaller companies. It's an excellent choice for investors seeking to match the performance of the widely followed S&P 500 index. The fund's low expense ratio ensures that more of your investment goes towards actual stock ownership rather than fees.
Cons: By focusing solely on large-cap stocks, VOO lacks exposure to potentially higher-growth small- and mid-cap companies. This concentration may limit diversification compared to broader market funds.
Pros and Cons of VTI
Pros: VTI provides comprehensive exposure to the entire U.S. stock market, including small- and mid-cap stocks that may offer higher growth potential. This broader diversification can potentially reduce risk and capture gains across all market segments. The fund's low expense ratio matches that of VOO, making it an equally cost-effective option.
Cons: The inclusion of smaller companies may lead to slightly higher volatility compared to VOO. Additionally, some investors may prefer the simplicity and recognizability of tracking the S&P 500 rather than a broader, less familiar index.
How Have VOO and VTI Performed Over the Past Decade?
To compare the performance of VOO and VTI, we can refer to the ETF comparison report created using our online tool PortfolioMetrics for the period from January 1st, 2014, to January 1s, 2024. The results provide interesting insights into the behavior of these two ETFs over the past decade.
VOO demonstrated slightly superior performance over the 10-year period, with a cumulative return of 211.9% compared to VTI's 196.5%. This translates to a Compound Annual Growth Rate (CAGR) of 8.2% for VOO and 7.8% for VTI. The marginal outperformance of VOO can be attributed to the strong performance of large-cap stocks during this period.
In terms of risk-adjusted returns, VOO also held a slight edge with a Sharpe Ratio of 0.73, compared to VTI's 0.70. This indicates that VOO provided marginally better returns per unit of risk taken. The annualized volatility was very similar for both funds, with VOO at 17.7% and VTI at 17.9%.
Both funds experienced significant drawdowns during market downturns. VOO's maximum drawdown was** -34.0%**, while VTI's was slightly deeper at -35.0%. The longest drawdown periods were also similar, with VOO taking 708 days to recover and VTI taking 714 days. This similarity in drawdown characteristics suggests that both funds react similarly to major market events, despite their different compositions.
Conclusion
Both VOO and VTI offer excellent, low-cost exposure to the U.S. stock market. VOO is ideal for investors seeking focused large-cap exposure, while VTI provides broader market coverage. Over the past decade, VOO has slightly outperformed VTI, but the difference is minimal.
The choice between these two ETFs ultimately depends on an investor's specific goals and beliefs about market dynamics. For those who prioritize stability and believe in the continued dominance of large-cap stocks, VOO might be the preferred choice. Investors seeking the widest possible market exposure and potential for gains from smaller companies might lean towards VTI.
Regardless of the choice, both funds have demonstrated strong long-term performance and remain excellent options for building a diversified, low-cost investment portfolio. As always, investors should consider their individual financial situations and consult with a financial advisor before making investment decisions.