Understanding the differences and similarities between index funds VTI and VTSAX might seem complicated at first, but it’s relatively easy once you take a moment to compare and contrast the two. In general, the two Vanguard index funds are different because one is an exchange-traded fund (ETF) while the other is a mutual fund. In summary, VTI is the ETF equivalent of VTSAX with a few minor differences. Before investing, it’s important to understand the potential advantages and drawbacks of each possible investment to better understand which investment best works with your timeline, potential investment size and risk tolerance.
What is VTI?
VTI stands for Vanguard Total Stock Market, and it’s considered an ETF. An ETF is a fund that helps lessen your risk exposure by diversifying your portfolio. An ETF includes a bundle of different assets that helps to spread out your risk exposure.
In terms of VTI, it’s considered a relatively riskier ETF for investment but also provides the possibility of higher returns. It’s categorized as a blend of large index funds that help measure the overall market. VTI is passively managed and tracks the CRSP US Total Market Index, which is also known as the Center for Research in Security Prices. Because of passive management, the related fees are relatively low, and the ETF holds a beta score that hovers around 1.
A beta score measures the amount of volatility that a stock contains. For example, other stocks are placed against the market for reference. The market has a beta score of one, and all other stocks are measured against that performance. In general, stocks with beta scores that are higher than one are considered more volatile and usually riskier than the market.
In general, VTI is made from a majority of technology stocks. Technology stocks currently comprise over a quarter of the included holdings within the basket. Although relatively stable, an investor needs to diversify to help counteract the amount of risk that VTI is exposed to in terms of investments with higher volatility such as small-cap stocks.
What is VTSAX?
VTSAX stands for Vanguard Total Stock Market Index Fund Admiral Shares. It’s considered an index fund; more specifically it’s a type of mutual fund. An index fund is considered a type of mutual fund or an ETF that gauges the financial market; an index fund follows a benchmark index and then provides a return.
VTSAX tracks how the CRSP US Total Market Index performs as a benchmark and includes large-, mid-, and small-cap equity. In general, VTSAX currently includes industry movers such as Apple Inc. (NASDAQ: AAPL) and Amazon.com Inc. (NASDAQ: AMZN). As of March 2022, it includes over 4,000 different holdings. VTSAX currently maintains a beta score that is slightly over 1. VTSAX performs relatively in line with the general market and is not considered highly volatile even though it is relatively risky. The mutual fund provides relatively lower fees and is passively managed.
Although the expenses are relatively low, it does require a minimum investment that hovers around $3,000. Consider that this option provides some risk protection because of its diversified nature but still responds to fluctuations in the market.
Key Similarities of VTI and VTSAX
VTI and VTSAX are similar in several key areas that make them relatively comparable investments. Both VTI and VTSAX offer relatively low expenses, and both are passively managed. Passively managed means that the fees are generally lower than those associated with actively managed investments.
In addition, VTI and VTSAX both include similar and near identical holdings. An interested investor can potentially invest in one index fund and have a similar understanding of the companies placed in the other. Index funds follow specific rules and aim to track the performance of certain baskets. For example, both VTI and VTSAX are mainly comprised of technology holdings. In terms of stock style, the two also offer a wide range of different stocks that are predominantly large-cap in nature. The two investment options also have betas that are close to one. That is not surprising given that VTI and VTSAX have an extremely similar makeup of their holdings.
VTI was created a little over 20 years ago in 2001 to allow interested investors to obtain ETF benefits from the previously created VTSAX mutual fund. VTSAX was created in the early 1990s. VTI was created to include basically the same holdings as VTSAX but with the ability to receive the benefits of an ETF.
Notable Differences Between VTI and VTSAX
One notable difference between VTI and VTSAX stems from their being different types of investments. While ETFs and mutual funds both include and measure diverse baskets, the two differ in several ways.
For one, ETFs such as VTI can be traded in a similar way to stocks, but mutual funds such as VTSAX must usually be purchased from a brokerage or Vanguard. In addition, mutual funds tend to be more actively managed than ETFs. ETFs are more tax-efficient and include a higher level of liquidity that some investors might view as beneficial.
VTSAX requires a much higher minimum investment than VTI. This initial minimum investment for VTSAX can pose a potential barrier to entry and deter some potential investors from deciding to invest in the mutual fund.
Advantages of Investing in Index Funds
Investing in index funds can be seen as beneficial in several ways. One way that index funds are seen as advantageous stems from their low fees. Typically, index funds offer low fees because they tend to be passively managed.
Index funds offer diversification, which means that they help lessen your level of risk exposure by providing multiple different investments at once. Diversification helps protect principal and potentially mitigate losses. For example, if one particular holding performs poorly, then the other holdings in the bundle could potentially reduce the loss.
Compare Index Funds
Benzinga offers a generous variety of insights and reviews to provide perspective on different types of index funds. Before investing, research different options and consider your level of risk and investing timeline. Like all investing, you can’t count on any guarantees about an investment’s future performance.
Frequently Asked Questions
Why is VTI currently more expensive?
Currently, VTI is more expensive than VTSAX for a multitude of reasons. One reason for the difference in prices stems from VTSAX’s requirement of a minimum investment of at least $3,000. The set minimum investment potentially acts as a barrier to entry for some potential investors. In contrast, VTI does not have a large barrier for investors and therefore is more available to a wider range of potential investors. Another reason for the difference in price stems from VTI’s better tax efficiency. In general, ETFs such as VTI are more tax-efficient and therefore may be seen by investors as the more attractive option.
Are VTI and VTSAX the Same?
The short and the long answer is yes and no. While VTI and VTSAX possess virtually the same holdings, the key difference stems from their different investment styles. While VTI is an ETF, VTSAX is a mutual fund. ETFs function similarly to stocks and therefore can be viewed as a more flexible investment option in terms of trading. In contrast, VTSAX is an investment fund and can only be purchased through approved channels such as the fund itself or an online brokerage. VTI and VTSAX operate and function differently than the other in terms of both accessibility and approachability.
However, the slight differences might prove helpful for an investor interested in holding either VTI or VTSAX. VTI offers more trading freedom because it can more easily be bought and sold in a similar way to stocks. In addition, VTI requires a much lower minimum investment. However, VTSAX is currently priced much lower than VTI, so it might seem like the more obtainable option if you intend to invest a larger sum from the start.
Before investing, consider your level of risk, and research which option would best fit into your portfolio by weighing the advantages and drawbacks of each investment option.
Overall, both VTI and VTSAX offer potential as long-term investments because holding over time allows both investments a better opportunity to weather market fluctuation. Although VTI and VTSAX are extremely similar, the key details that differentiate the two could potentially be pivotal to the discerning investor.