The Vanguard Total Stock Market ETF (VTI +1.35%) and the Vanguard S&P 500 ETF (VOO +1.60%) may look very similar in composition, fees, and performance. In reality, they are. But the markets they target are very different.
The fact that one fund owns around 500 stocks and the other owns more than 3,500 is just one thing that differentiates the two. Those differences that only become obvious when you look under the hood can make one preferable to another, especially during market sell-offs.
Image source: Getty Images.
Key takeaways
- The big differentiator: VOO focuses only one large caps while VTI invests in large, mid, and small caps.
- Because both exchange-traded funds (ETFs) are market-cap-weighted, portfolio compositions look quite similar. But VTI's inclusion of small caps makes it more diversified.
- In environments where megacap tech isn't leading the market, VTI could be expected to outperform.
- In a market sell-off, VOO should outperform, assuming small caps do worse than large caps.
VOO vs. VTI: How they're built and what separates them
Given that these two funds are market-cap-weighted portfolios consisting of U.S. stocks, they'll always be highly correlated to each other. But the Vanguard Total Stock Market ETF invests in about 3,000 additional companies beyond just the S&P 500.
There's about 88% overlap between the two funds, which means the difference is a 12% allocation to small and mid caps in the Vanguard Total Stock Market ETF that the S&P 500 ETF doesn't have. Which ETF holds up better in a market downturn really depends on how that small-/mid-cap allocation is likely to perform.
VOO vs. VTI: Performance & metrics
| Metric | VOO | VTI |
|---|---|---|
| Expense ratio | 0.03% | 0.03% |
| Assets under management | $910 billion | $615 billion |
| Dividend yield | 1.2% | 1.2% |
| 10-year average annual return | 15% | 14.5% |
| Holdings | 504 | 3,507 |
| Top holdings | Nvidia (7.6%), Apple (6.7%), Microsoft (4.9%) | Nvidia (6.4%), Apple (5.9%), Microsoft (4.4%) |
Data source: Vanguard.
The performance gap between these two ETFs is clearly due to the outperformance of megacap tech stocks over the past several years. The artificial intelligence (AI) boom resulted in just a handful of stocks pulling the averages higher. Both funds had large allocations to the "Magnificent Seven" names, but the S&P 500's was larger, as is evidenced by the top individual holdings of each ETF.
In stock market downturns, it's typical to see small caps lagging large caps. While both groups are very likely to fall, investors generally prefer the relative safety and durability of more well-established companies. Small caps as a whole are more speculative and less profitable. That's usually not where investors focus their money in challenging markets.
Given this, the Vanguard S&P 500 ETF is likely the better buy in a market downturn. It has relatively better top-to-bottom strength in its holdings. That should help give it a modest performance edge.
