Questions about VTI or VOO are some of the more common on several forums. In this post I would like to address some of the key points that can help understand the similarities and the differences between these two Index Funds.
The Similarities
VTI and VOO are both Vanguard Exchange Traded Funds (ETFs). VTI is a Total Market Index Fund. VOO is a S&P 500 Index Fund.
Both ETFs have very low Management Expense Fees of 0.03%. Due to the power of compounding even a small difference in fees makes a huge difference in the long term. The low fees is a result of passive management of the fund. This means that the fund managers follow a specific investment formula rather than using specialized research or judgement in making investment decisions.
The Differences
Number of Companies
VTI Invests in the Total US Market. This means the fund invests into 3,781 companies as of this writing. The weighting or the percentage invested in each company is proportional to the relative market capitalization of the company. This means Apple is the largest holding at ~4.6%.
VOO Invests in the companies that are part of the S&P 500 Index. S&P 500 Index tracks the market weighted performance of the 500 largest US Public Companies. Since the Index is also market capitalization weighted, Apple is the largest holding of VOO at ~5.8%.
Long Tail
Although it seems like VTI is more broadly diversified because it has over 3,781 companies versus ~500 companies in VOO, the reality is less drastic.
The top 10 companies in both funds are exactly the same and account for about ~25% of the total size of the investments of the funds.
The top 500 companies of VTI account for 84% of the investments. This means that the remaining 3,281 companies account for a mere 16% of the investments. This is a very long tail. In terms of percentages, these investments are almost negligible at around 0.01% each and lower.
The Devil is in the Details – The case of TESLA
It is easy to write-off VTI as having needless diversification. However, there are certain flaws in the S&P 500 Index. The S&P 500 Index has an index committee that decides on which companies to include in the index. This process can sometimes be delayed for arbitrary reasons that are not always transparent.
This was evident in the case of Tesla. Tesla was included in the S&P 500 index only recently, on 21 Dec, 2020. At the time of inclusion the market cap of Tesla was at about 700Billion $s. This means that it was in the top 10 companies in the US by market cap even before the inclusion into the index.
But, if you had owned the VOO, you would not have had Tesla in your portfolio until the end of 2020. As we know Tesla had a stellar year in 2020 gaining as much as 1000%!!!. And this was before the inclusion into the index.
But, if you had invested in VTI instead of VOO, then you would have had Tesla in your portfolio and the fund would have accumulated Tesla all along the journey from a smaller proportion of the fund until it reached top 10 companies in the US.
The Verdict
It is hard to recommend one over the other. I would lean towards the VTI as VOO is dependent on the S&P 500 index and as I have written in an earlier article , S&P 500 Index committee is not transparent which creates inefficiencies.
However, over the really long term, ie. 10+ years, the differences between VTI and VOO are negligible.
Disclaimer: All content in this website is not to be construed as investment advice in any form. The author is not affiliated with Vanguard or any of its subsidiaries.