Voo Vs Vtsax: What’s The Difference?

Written by Peter Keszegh

When it comes to investing, Vanguard funds are a popular choice for a reason. Two of their most well-known options are VOO and VTSAX. While both are great options, knowing the difference between VOO vs VTSAX is important. 

VOO is an ETF that follows the S&P 500, basically the top 500 biggest companies in the US VTSAX is a mutual fund that covers a much wider range of US stocks, including smaller companies.

The right choice for you depends on whether you want to stick with the big names or get exposure to a broader market – it all comes down to your investment goals.

Voo Vs Vtsax

What is VOO?

VOO stands for the Vanguard S&P 500 ETF (Exchange-Traded Fund). This fund aims to mirror the performance of the S&P 500 index. This index is a collection of the 500 largest publicly traded companies in the United States

These companies are powerhouses within the American economy, think names like Apple, Microsoft, and Amazon.

How VOO tracks the S&P 500

VOO achieves its goal by investing in stocks that are included in the S&P 500 index. It practically buys a little piece of each company in the index, in proportions that match their size within the index. 

This means that if a company like Apple has a large weighting in the S&P 500, VOO will also hold a larger portion of Apple stock.

Benefits of investing in VOO

First, VOO gives you instant diversification across 500 top US companies. This helps reduce the risk of your portfolio being overly affected by the performance of any single company.

Imagine holding stock in only one company, and that company has a bad year – your investment would take a hit. VOO spreads the risk out, lessening the impact of any single company doing poorly.

VOO also boasts a very low expense ratio (that's the annual fee you pay). This means you keep more of your returns, allowing your investment to grow faster over time. Every dollar you don't pay in fees is a dollar that continues to work for you.

Lastly, the S&P 500 has a solid track record of delivering strong returns over long periods. While past performance doesn't guarantee future results, it does provide a good indication that VOO, by tracking this index, has the potential for long-term growth.

Drawbacks of investing in VOO

VOO focuses heavily on large-cap companies, so you may miss out on the potential growth of smaller, up-and-coming companies. These smaller companies can sometimes outperform their larger counterparts, offering higher potential returns.

Since VOO tracks the S&P 500, it will also experience the ups and downs of the overall market. This can lead to short-term fluctuations in your investment value. It's important to remember that investing in the market always involves some risk, and VOO is no exception.

How investors can use VOO

  1. 1
    Core portfolio holding: VOO can form the backbone of a well-diversified investment portfolio. Its focus on large, established companies offers stability, while still providing potential for growth. 
  2. 2
    Passive investment strategy: If you're not keen on actively picking stocks, VOO allows you to invest in the overall market and benefit from long-term trends.
  3. 3
    Retirement savings: VOO's potential for long-term growth makes it a suitable option for retirement accounts, like a 401(k) or an IRA.

Is VOO right for you?

VOO might be a good fit if you're looking for a low-cost way to track a major market index and you want a focus on well-established companies. However, if you're seeking higher potential growth or prefer broader exposure to the entire US market, you might want to explore other options like VTSAX. 

What is VTSAX?

What is VTSAX?

VTSAX, short for Vanguard Total Stock Market Index Fund Admiral Shares, is a mutual fund designed to provide broad exposure to the entire US stock market. Think of it as a giant basket holding stocks of companies of all sizes, from giants like Apple to smaller, up-and-coming businesses.

How VTSAX gives you broad market exposure

The goal of VTSAX is to track the performance of the CRSP US Total Market Index. This index includes thousands of stocks across the large-, mid-, and small-cap segments of the market. By investing in VTSAX, you're essentially getting a slice of the whole pie of the US stock market.

Benefits of investing in VTSAX

VTSAX offers an extremely high level of diversification across the entire US stock market. This protects your portfolio from being overly reliant on any specific company or industry. If one sector performs poorly, your investment is cushioned by holdings across the broader market.

Like VOO, VTSAX is also known for its incredibly low expense ratio. This translates to significant savings over time, as fees directly eat into your investment returns.

By including smaller and mid-sized companies, VTSAX allows you to potentially ride the growth wave of up-and-coming businesses. While there's more risk involved, these smaller companies might offer explosive growth potential that can boost your overall returns.

The US stock market has a long track record of growth over time. VTSAX lets you participate in that long-term trajectory, benefiting from the innovation and expansion of companies across all sizes.

Drawbacks of investing in VTSAX

The flip side of higher growth potential in smaller companies is higher risk. If market conditions turn against them, these smaller companies can see steeper declines, leading to increased volatility in VTSAX compared to VOO.

VTSAX is a mutual fund, while VOO is an ETF. This means that in certain tax scenarios, VTSAX can sometimes trigger slightly higher tax liabilities. However, for most long-term investors, this difference is minimal.

How investors can use VTSAX

  1. 1
    Sole investment in a portfolio: Due to its extreme diversification, VTSAX is convenient as a “one and done” investment. This approach is especially popular for hands-off investors.
  2. 2
    Core of a long-term strategy: VTSAX's focus on broad market growth makes it ideal for retirement accounts like 401(k)s and IRAs, where you have a long investment horizon.
  3. 3
    Seeking higher risk/reward: If you have a higher risk tolerance and seek the potential for outsized returns, adding VTSAX to your portfolio gives you exposure to the growth potential of smaller companies.
  4. 4
    Offsetting a conservative portfolio: If most of your holdings are in bonds or very stable stocks, VTSAX can be used to introduce a calculated element of higher-growth potential.
  5. 5
    A bet on the overall US economy: If you believe in the long-term health and growth of the American economy, VTSAX provides a way to invest in that belief across the full range of companies.

Is VTSAX right for you?

VTSAX could be a great choice if you prioritize maximum diversification and are comfortable with moderate volatility in exchange for potentially higher returns over the long-term.

It's ideal if you believe in the overall growth potential of the US market and want a piece of the action across all company sizes. If you're highly risk-averse and prefer the stability of giant corporations, VOO might be a better fit.

VOO vs VTSAX: Key differences

VOO vs VTSAX: Key differences

While both VOO and VTSAX offer low-cost, broad exposure to the US market, here's a detailed look at how they differ:

Composition

  • VOO: Tracks the S&P 500 Index, focusing on the 500 largest publicly traded companies in the United States. These companies represent the backbone of the American economy and are known for their size and stability.
  • VTSAX: Tracks the CRSP US Total Market Index. This index encompasses nearly the entire investable US stock market, including large, mid-sized, and small companies. VTSAX gives you a stake in the well-known giants and exposure to the thousands of smaller, innovative businesses with strong growth potential. 

Expense ratio

Both VOO and VTSAX boast incredibly low expense ratios (the annual fee you pay to own the fund). However, VTSAX often has a slight advantage with a marginally lower fee.

While the difference seems minuscule, over long periods, these small cost differences can compound and make a significant impact on your overall returns.

Performance

  • Short-term differences: Due to its inclusion of smaller companies, VTSAX might sometimes outperform or slightly underperform VOO in the short term. This variability depends on how well smaller companies are performing at that specific time, compared to the large-cap giants of the S&P 500.
  • Long-term similarity: Historically, both VOO and VTSAX have shown remarkably similar performance over extended periods (think decades). This similarity is because the overall US stock market has a strong track record of delivering growth over the long run, and both funds participate in that market, albeit with slightly different focuses. 

Which is better: VOO vs VTSAX

There's no universally "better" fund. Ultimately, it depends on your individual circumstances and preferences. Here's a deeper look at why you might choose one over the other:

  • VOO: Leaning towards blue-chip stability - If you prioritize the stability of well-established industry leaders and prefer less volatility, VOO's focus on large-cap companies might be a better fit.
  • VTSAX: Seeking maximum diversification and growth potential – If you are comfortable with some short-term fluctuations in exchange for the potential of higher long-term returns driven by smaller and mid-sized companies, then VTSAX's wider reach could be appealing.

Choosing the right one for you

Consider these factors when deciding:

  1. 1
    Risk tolerance: How comfortable are you with occasional dips in your investment's value, knowing that this comes with the potential for higher long-term growth? VTSAX might involve a bit more volatility compared to VOO. 
  2. 2
    Investment goals: Are you saving for retirement decades in the future, or do you have a shorter investment horizon? VTSAX tends to shine over very long periods, allowing smaller companies time to reach their full potential. 
  3. 3
    Belief in small-cap potential: Do you strongly believe that innovative, smaller companies can become the giants of tomorrow? If yes,  VTSAX's inclusion of this market segment aligns with that belief. 
  4. 4
    Tax considerations: VOO is an ETF and VTSAX is a mutual fund. This carries subtle tax implications. ETFs can sometimes be slightly more tax-efficient in certain situations, but the overall impact is often small for long-term investors. 
  5. 5
    Simplifying your portfolio: If you want a single fund to form the core of your investment holdings, VTSAX's incredibly broad coverage makes it a strong contender. 
Choosing between VOO vs VTSAX

Final thoughts: Choosing between VOO vs VTSAX

Still thinking about whether VOO vs VTSAX is a better fit? Both VOO and VTSAX are excellent, low-cost ways to invest in the US market, and the right pick depends on your priorities.

Ultimately, a bit of research into your own risk tolerance and investment goals is the best guide to the right fund for your portfolio.

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