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VOO vs. VFIAX: Which is a better index fund?

VOO (Vanguard S&P 500 ETF) and VFIAX (Vanguard 500 Index Fund Admiral Shares are both offered by Vanguard, one of the leading providers of low-cost index funds.  In large part, these funds are identical in their mandates as they both attempt to replicate the performance of the S&P 500.

VOO and VFIAX main difference is the form of the fund being used – VOO is an exchange-traded fund (ETF), while VFIAX is a mutual fund.

ETFs and mutual funds are mostly distinguished by their trading mechanisms. ETFs trade on stock exchanges throughout the trading day, much like individual stocks, while mutual funds are priced and traded at the end of the day based on their end of day net asset values (NAV).

Given their different structures (ETF vs. mutual fund format), VOO and VFIAX differ in structure, fees, investment minimums, and tax efficiency.

In this post, we’ll compare VOO and VFIAX, so you can make more informed decisions about which fund best suits your investment goals and preferences.

This article was submitted by Jorge Sanchez, M.D.

 

What is the S&P 500 Index?

The S&P 500 index is the index that tracks 500 of the largest publicly-traded companies in the US. In this way, the S&P 500 is a US Large Cap index. This index includes both stocks listed on the NYSE and NASDAQ exchanges and it represents about 80% of the value of the US stock market. It is widely used as a benchmark by US investors to define the health of the overall stock market and for investors to compare their performance to.

 

What is VFIAX?

VFIAX is Vanguard’s S&P 500 Index Fund. Although there are now many such S&P 500 replicating funds, the Vanguard 500 Index Funds Admiral Shares (VFIAX) is the oldest.

Given that the fund attempts to replicate the S&P 500’s performance, VFIAX is said to be a “large-blend index fund;” thus, it is representative of the overall market in terms of performance. One of the best aspects of owning index funds such as VFIAX is that, given that they hold a basket of stocks or bonds, they are inherently diversified and are generally considered safer than holding individual stocks within an index.

As with many other passively managed funds, VFIAX comes with low fees. However, to access this fund, you will need to make a minimum initial investment of $3,000.

As mentioned above, VFIAX holds a number of large stocks, and therefore, it is inherently diversified. Below is the list of the 10 largest holdings of VFIAX (as of August 9th, 2023):

  • Apple Inc – 7.69%
  • Microsoft Corp – 6.79%
  • Amazon.com Inc – 3.12%
  • NVIDIA Corp – 2.81%
  • Alphabet Inc Class A – 1.91%
  • Tesla Inc – 1.89%
  • Meta Platforms Inc Class A – 1.70%
  • Alphabet Inc Class C – 1.66%
  • Berkshire Hathaway Inc Class B – 1.63%
  • UnitedHealth Group Inc – 1.20%

 

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What is VOO?

The Vanguard 500 Index Fund (VOO) is nearly identical to VFIAX except for one key difference – VOO is Vanguard’s S&P 500 index tracking ETF offering, whereas VFIAX is the mutual fund alternative. This difference in format has some implications which we will discuss over the course of the remainder of the article.

 

VOO vs. VFIAX: Which Index Fund is Better?

VOOVFIAXEdge?
Tax Loss HarvestingDisadvantaged- Settlement Period AppliesAdvantaged- Same Day ReinvestmentVFIAX
Expense Ratio / Fees0.03%0.04%VOO
Minimum InvestmentNo Minimum$3,000VOO
Tax Efficiency*Slightly More Tax EfficientVOO
Liquidity & TradabilityIntraday Trading AvailableAutomated Periodic Investing AvailableVOO
Automated Periodic InvestingNoYesVFIAX

Data as of 08/09/2023

 

Expense Ratios – Slight Edge to VOO

Given that they are passively managed, VFIAX and VOO have very low expense ratios – typical of Vanguard funds.

However, although relatively marginal, VOO tends to have a slight edge here. The expense ratio of VFIAX is usually a basis point (hundredth of a percentage point) lower than VOO, making it slightly cheaper to hold. Although this cost is small in any given year, slight differences in expense ratios can accumulate to meaningful differences in accumulation value over time. Specifically, as of August 9th, 2023, the differences between expense ratios indeed equated to 1bp in favor of VOO. To put this into context, that is $1 of additional fees per year per $10,000 invested.

 

Minimum Investments – Goes to VOO

When it comes to investment minimums, the edge has to go to VOO over VFIAX.

As with other ETFs, the minimum investment requirement for VOO is the price of one share. This contrasts with mutual funds, which generally require some initial buy-in over a single share pricing. These minimums can vary depending on the brokerage and account type used.

While this will likely not be the most important factor for many buy-and-hold long-term investors, smaller investment minimums can be a make-or-break criterion for those who like to add various funds to their portfolio or trade in and out of positions.

So, if you are just getting started with investing or want to split your investment across several funds, VOO may be a better option for you due to its lower barrier to entry.

To learn more about the benefits of index fund investing, check out our article here.

 

Trading and Liquidity – Split Decision

If you are an investor who likes to change your positions daily, the ETF equivalent (VOO) is your better option.

Unlike mutual funds, you can buy and sell ETFs throughout the day at any time during market hours. This is not the case with mutual funds, which are only traded at the end of the day based on Net Asset Value (NAV). This benefit of ETFs doesn’t come without drawbacks, though – given that ETFs can trade throughout the day, they typically trade at prices slightly different from their NAV. This difference is called a bid-ask spread.

Given that VOO is heavily traded, this bid-ask spread is small/negligible (0.00% as of 8.11.2023). Still, depending on the date of sale/purchase, it could represent an additional ~0.01% fee on the entry/exit of an investor’s position. Such bid-ask spreads are notably more significant for more thinly traded ETFs than VOO.

However, if you are a long-term buy-and-hold investor not concerned with trading execution strategies and small entry/exit “fees” associated with negligible bid-ask spreads, you may be indifferent between Vanguard’s flagship S&P 500 funds. One notable trading benefit of VFIAX is that you can set up automated dollar cost-averaging rules to automate a periodic investment process.

 

Tax Efficiency – Split Decision

As investors, we should be concerned not only about investment returns but also about costs. Both direct costs (in the form of expense ratios, for example) and more indirect costs (including tax consequences, which may also vary between investments).

If you hold the assets in tax-deferred/non-taxable accounts (such as IRAs), ETFs will generally have a slight edge from a tax efficiency perspective. As a result of some of the internal workings of ETFs vs. mutual funds, ETFs tend to distribute comparatively fewer capital gains to shareholders – these same gains are simply more challenging to manage efficiently via the mutual fund format. However, Vanguard has notably solved this distinction by creating a patented process to make its mutual funds and ETFs equivalently tax efficient.

 

Tax Loss Harvesting – VFIAX Wins

Tax-loss harvesting is a strategy that involves selling investments at a loss to offset gains (and up to $3,000 in ordinary income). Tax-loss harvesting only matters in taxable investment accounts since you aren’t taxed on capital gains in tax-deferred accounts. While this strategy can be implemented using any type of investment (stocks, ETFs, mutual funds, or other property), mutual funds have an advantage because of how they are traded.

When you sell an ETF, you’ll have to wait for the funds to settle before you can reinvest the proceeds. You may have to wait one or two days before you have access to the funds.

For mutual funds, the trades only happen after the market closes, you can sell your mutual fund and have the proceeds scheduled to reinvest the same day. This allows you to harvest tax-losses and reinvest in a similar (or different) fund that same day.  If you had a loss in VFIAX, you could harvest the loss and reinvest the funds in a similar fund such as VTSAX (Vanguard Total Market Fund) without worrying about missing any market movements the next day but still being able to use the losses to offset gains for taxes.

 

Dividend Reinvestment – Tie

Believe it or not, dividend reinvestment empirically accounts for a tremendous amount of long-term performance for buy-and-hold investors. Studies have shown that much of the accumulated gains of investors are a direct result of long-term dividend reinvestment strategies.

When considering a fund, ease of dividend reinvestment should definitely be at the forefront of your mind. Luckily, VOO and VFIAX have seamless automated dividend reinvestment processes at the prevailing market price during the reinvestment date.

 

Final Thoughts

If you are looking for a low-cost entry point for S&P 500 exposure, both VOO and VFIAX are excellent options. Choosing between the two depends on your individual preferences and goals. Deciding on which fund to invest in really comes down to the decision of investing in two comparable funds – one via its ETF format and the other via its mutual fund format.

As an ETF, VOO definitely offers some advantages with respect to lower investment requirements and intraday trading advantages. However, VFIAX, being a mutual fund, may be more suitable for long-term investors with larger sums to invest who don’t prioritize intraday trading.

Ultimately, whether an investor chooses VOO or VFIAX, the most critical aspect is to remain consistent and thoughtful with your investment strategy and personalized objectives. Both funds provide cost-effective access to the US large-cap market and are likely to serve investors well over the long term.

 

Relevant resources:

ETFs vs. Mutual Funds: Which To Choose | Vanguard

VOO Vs VFIAX: Which Is Better For Long-Term Investors (VFIAX) | Seeking Alpha

Vanguard 500 Index Fund (VFIAX) Holdings – Yahoo Finance

2019 Vanguard Mutual Fund Tax Dodge

Bid-Ask-Spread | Vanguard Advisors

 



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6 thoughts on “VOO vs. VFIAX: Which is a better index fund?”

  1. I was confused by this:

    “When you sell an ETF, you’ll have to wait for the funds to settle before you can reinvest the proceeds. You may have to wait one or two days before you have access to the funds.”

    My experience with TLH has been that I can make the trades immediately. So for instance, during March, 2020, I could sell VOO and buy VTI within minutes of each other in brokerage accounts at Schwab, Fidelity and TD Ameritrade because the brokerages allowed the buy orders to be placed knowing that funds would be available from the sell trades. Has this not been your experience?

    Reply
  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. I was confused by this:

    “When you sell an ETF, you’ll have to wait for the funds to settle before you can reinvest the proceeds. You may have to wait one or two days before you have access to the funds.”

    My experience with TLH has been that I can make the trades immediately. So for instance, during March, 2020, I could sell VOO and buy VTI within minutes of each other in brokerage accounts at Schwab, Fidelity and TD Ameritrade because the brokerages allowed the buy orders to be placed knowing that funds would be available from the sell trades. Has this not been your experience?

    Reply
  4. I was confused by this:

    “When you sell an ETF, you’ll have to wait for the funds to settle before you can reinvest the proceeds. You may have to wait one or two days before you have access to the funds.”

    My experience with TLH has been that I can make the trades immediately. So for instance, during March, 2020, I could sell VOO and buy VTI within minutes of each other in brokerage accounts at Schwab, Fidelity and TD Ameritrade because the brokerages allowed the buy orders to be placed knowing that funds would be available from the sell trades. Has this not been your experience?

    Reply
  5. Just a clarification for Fidelity customer readers: Fidelity (ishares) ETFs can be sold and bought immediately for tax loss harvesting with no settlement period. I was able to harvest ITOT shares and buy VTI shares in less than 60 seconds using their app. If you plan to remove the funds after selling, yes there is a settlement period but not for immediate reinvestment within the same account.

    At least for Fidelity, the TLH advantage strongly favors ETFs.

    Reply

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