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VTSAX vs VFIAX: Which Vanguard Index Fund Is Better?

If you’re looking for a low-cost way to invest in the broad stock market, you’ve probably come across Vanguard mutual funds. Two of the most popular are VTSAX and VFIAX.

VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) and VFIAX (Vanguard 500 Index Fund Admiral Shares) are two index funds that track different US stock indexes. Both funds are offered by Vanguard, one of the leading providers of low-cost index funds.

Vanguard offers two classes of shares for its mutual funds – admiral shares and Investor shares. Admiral shares have lower fees than investor shares but higher minimum investment requirements. To ensure that we are comparing apples to apples, we will only consider the admiral share options of each fund in our comparison today.

VTSAX and VFIAX offer exposure to many American companies with low fees and consistent performance. But which one is better?

 

In this article, we will compare VTSAX and VFIAX in terms of performance, fees, and tax efficiency.

 

What Are Index Funds?

Index funds are a type of mutual fund that attempts to replicate the performance of a specific market index, such as the S&P 500 or the Nasdaq Composite.

Given that index funds simply try to replicate their chosen index instead of outperforming it, they are said to be managed “passively.” That means that managers do not make active bets to beat the performance of the chosen index by picking and choosing stocks or timing the market. Instead, the funds buy and hold all the stocks, or at least most of the stocks that the index tracks. Those stocks are then held in the fund in amounts proportionate to their market value.

 

What is VTSAX?

VTSAX tracks the CRSP US Total Market Index. This index covers almost 100% of the US equity market. By extension, this means that VTSAX holds stocks of all sizes and types (large-cap, mid-cap, and small-cap, growth, value) that trade on the Nasdaq or NYSE.

Here’s a comprehensive article we wrote on Why VTSAX?

 

What is VFIAX?

VFIAX tracks the S&P 500 index, comprising 500 large-cap US companies. These companies represent about 80% of the total US stock market. The S&P 500 is a commonly referenced index and often serves as the benchmark for the US stock market’s performance.

 

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VTSAX vs. VFIAX: Which Index Fund is Better?

When choosing between VTSAX and VFIAX, we must apply a fine tooth comb. They are both excellent funds in their ability to offer low-cost exposure to the broad US stock market.
VFIAX does it by replicating the S&P 500, and VTSAX does it by attempting to replicate the entire stock market, including small-cap and mid-cap stocks. That being said, although the funds are slightly different in how they go about selecting their holdings, both funds are nearly identical. Below is a table comparing these funds regarding historical performance, tax efficiency, and fees:

 

VTSAXVFIAXEdge?
DiversificationAdvantage- holds more stocks across different sizes and stylesDisadvantaged- more concentrated in the largest US companiesVTSAX
Minimum Investments$3,000$3,000Tie
Expense Rations0.04%0.04%Tie
Tax EfficiencyTie
Dividend Yield1.451.47Tie (Slight edge to VFIAX)

 

Diversification– VTSAX Wins

One of the main differences between VTSAX and VFIAX is the number and diversity of their holdings.

VTSAX holds more than seven times as many stocks as VFIAX (3,596 vs. 508 as of December 31, 2020). This means VTSAX offers more diversification than VFIAX across different sectors, industries, and companies. Diversification is important because it reduces the risk of losing money due to poor performance or failure of a single stock or sector.

From the table below, you can see that sector allocations between the two funds are quite similar. The differences exist within consumer discretionary, telecommunication, and industrials. That’s because VTSAX is a total stock fund, which maintains exposure to mid-cap and small-cap stocks, which tend to be more concentrated within these sectors. These additional exposures come from the inherently more diversified nature of VTSAX due to its broader holdings base.

The table below shows the sector breakdown of both funds as of September 2, 2023:

 

SectorVTSAX (%)VFIAX (%)
Technology30.128.1
Consumer Discretionary14.410.6
Healthcare12.613.1
Industrials138.5
Financials10.512.6
Telecommunication28.7
Consumer Staples5.16.6
Utilities2.82.5
Real Estate32.5
Energy4.54.3
Materials22.5

 

Source: VTSAX Data, VFIAX Data

Further, if we look at the holdings of both funds in the table below, we can see that VFIAX is inherently less diversified than VTSAX among small-cap and mid-cap companies. Although the holdings are quite the same, the weightings are slightly different, with VFIAX being slightly more concentrated in these top 10 holdings.

 

RankVTSAX (%)VFIAX (%)
1Apple Inc. (6.53%)Apple Inc. (7.55%)
2Microsoft Corp. (5.56%)Microsoft Corp. (6.50%)
3Amazon.com Inc. (2.59%)Amazon.com Inc. (3.10%)
4NVIDIA Corp (2.44%)NVIDIA Corp (3.01%)
5Alphabet Inc. A (1.75%)Alphabet Inc. A (2.05%)
6Tesla Inc C (1.60%)Tesla Inc (1.87%)
7Meta Platforms Inc Class A (1.57%)Meta Platforms Inc Class A (1.83%)
8Alphabet Inc Class C (1.48%)Alphabet Inc Class C (1.77%)
9Berkshire Hathaway Inc Class B (1.40%)Berkshire Hathaway Inc Class B (1.63%)
10UnitedHealth Group Inc (1.05%)UnitedHealth Group Inc (1.23%)

 

Source: VFIAX Holdings, VTSAX Holdings

VTSAX undeniably has more diversification than VFIAX, as it holds more stocks across different sizes and styles. This means that VTSAX may be more well insulated against extreme market outcomes affecting mostly large-cap stock.

VTSAX also can seize on market opportunities at the small-cap and mid-cap levels. That said, it also means that VTSAX may deviate at times from the performance of the S&P 500, which is generally considered the benchmark of the US stock market.

 

Minimum Investments and Expense Ratios –  Tie

When deciding between two funds, another critical distinction is typically to evaluate them based on fees and minimum investment requirements.

In the case of VTSAX and VFIAX, this difference is zero. The two funds have the same expense ratio of 0.04% and the exact minimum investment requirement of $3,000. These low fees and minimal minimum investment requirements align with Vanguard’s position as an investor-focused provider of low-cost and easy-to-access mutual funds.

 

Tax efficiency– Tie

The funds are quite similar in tax efficiency.

Tax efficiency involves how much investment returns are reduced by taxes. These obligations typically have to do with the exposure that has to do with internal turnover of holdings, which generates capital gains obligations on an annual basis. The more tax-efficient a fund is, the less you will have to pay on your investments in terms of yearly taxes.

VTSAX and VFIAX are tax-efficient funds because they are both passively managed index funds and do not look to trade frequently. Therefore, they don’t generate high amounts of turnover or high amounts of capital gains distributions/obligations.

In addition to tax obligations derived from turnover, tax obligations are also generated from distributing dividends. Dividends are payments that companies make to their shareholders from earnings or profits.

The table below shows the dividend yield and the percentage of qualified dividends of both funds as of December 31, 2022, VFIAX, VTSAX

 

FundDividend Yield (%)
VTSAX1.45
VTSAX1.47

 

As you can see, dividend yields between the two funds are very similar (annualized dividends per share divided by share price).

Given that both funds have exceptionally similar dividend yields, we can conclude that the tax efficiency of the funds from the standpoint of tax obligations generated from dividend payments is almost identical.

 

Overall Performance– Tie

Although both funds have delivered strong performance over a long time, they have experienced some periods of underperformance and high volatility.

Below is a table displaying the annual returns of both funds for the past ten years:

The table below shows the yearly returns of both funds for the past ten years:

YearVTSAX (%)VFIAX (%)
2022-19.53%-18.15%
202125.71%28.66%
202020.99%18.37%
201930.80%31.46%
2018-5.17%-4.43%
201721.17%21.79%
201612.66%11.93%
20150.39%1.36%
201412.56%13.64%
201333.52%32.33%

As you can see, given how similar VTSAX and VFIAX are in constituent holdings, performance is very similar between the two funds.

 

Conclusion

VTSAX and VFIAX are popular index funds from Vanguard that track different segments of the US stock market.

Both funds offer an easy way to gain diversified and low-cost exposure to many US companies with limited fees and consistent historical performance.

As stated above. VTSAX is quite a bit more diversified than VFIAX as it maintains exposure to the total US stock market, whereas VFIAX only holds large-cap stocks that make up the S&P 500.

Therefore, choosing between VTSAX and VFIAX depends on personal preference and investment goals. If you want to invest in the total US stock market and diversify your portfolio across segments and different-sized companies, you may prefer VTSAX. If you want to invest in the largest US companies, then VFIAX may be the better choice.

Indeed, if you are interested in both, you can split holdings between the two funds. However, as illustrated above, when choosing between two funds, performance shouldn’t be your only consideration – tax consequences, fees, and individual holdings should also be considered.

 



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