VOO Vs. VTI Smackdown: Know How They Differ Before You Invest

Summary

• Warren Buffett has long advocated that retail investors should invest in a "broad market index fund." But which broad market fund is best?
• The choice comes down to funds that track the S&P 500 and those that track all of the many more thousands of stocks that make up the U.S. stock market.
• This article compares the two Vanguard Index ETFs that follow these two different indexing approaches, looking at their performance under different market conditions.
• It then examines the differences between the ETFs looking at characteristics of their holdings, their valuations, their dividends, and most importantly, how their indexes select stocks.

So, you've decided to take Warren Buffett's advice to invest in a broad market index fund. Buffett's support for index funds for the average investors goes back to him telling John Bogle, "A low-cost fund is the most sensible equity investment for the great majority of investors," followed by telling his stockholders, "My regular recommendation has been a low-cost S&P 500 index fund," and then confirmed when he put his money where his mouth was with the million-dollar bet he made with hedge fund managers that, over 10 years, he could beat their results with an S&P 500 index fund. Which he did.

But, which low cost index fund should you invest in? Buffett's bet and the instructions he has left for the management of his widow's assets cite the S&P 500. The oldest of these is John Bogle's very first index fund, launched in 1982, which was The Vanguard 500 Index fund (VFINX). The Vanguard 500 ETF (NYSEARCA:VOO) is a share class of that fund, as is the Admiral Shares version, VFIAX.

But those of us who have been investing in index funds for decades know there has long been a competing index fund offering an even broader exposure to U.S. stocks, the Vanguard Total Stock Market Fund (VTSMX) of which the Admiral Shares version, VTSAX, and the Vanguard Total Stock Market ETF (NYSEARCA:VTI) are share classes.

I have long invested in both funds, tax loss harvesting between the two when dips in the market gives me that opportunity. A quick glance at the very long-term performance of their oldest share classes shows that they differ very little from each other. I have graphed VFINX and VTSMX as both are the oldest share classes of their respective funds and ETFs.

Vanguard 500 Index (VFINX) vs Vanguard Total Stock Market

Analyst’s Disclosure:I am/we are long VTSAX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.