Which ETF is a Better Choice?

Photo by Robert Anasch on Unsplash

It’s hard to argue against the value of index investing and the wealth it can create for the everyday investor. Saving and investing a percentage of your paycheck is a simple money habit that can change your life over the long term. 

The infamous Warren Buffet has said that his personal will and trust instructs his family to invest 90% in the S&P 500 and 10% in Treasury Bonds. When a guy who made billions of dollars picking stocks tells his family to just invest in index funds, you should probably listen. 

Jack Bogle the creator of the index fund championed the benefits of passive investing throughout his life. Economists like Burton G Malkiel, comically demonstrate how a monkey throwing darts at stocks is able to beat an active manager picking individuals stocks. 

Here are 3 reasons why investing in passive index funds, like VTI and VOO, is a smart choice.

1 – Most actively managed large-cap funds underperform the S&P 500 index

Here are the percentages of funds that fail to beat the market over the following time periods:

  • Five-Year: 80.60%
  • Three-Year: 71.13%
  • One-Year: 70.98%

Data as of Dec 31, 2019

Source: S&P Dow Jones Indices

The first take away, 80% of professional stock pickers don’t beat the index. In what world do you have more resources and information than the pros? You don’t so stop picking stocks!

The second takeaway, how in the world are you supposed to pick the fund that picked the stock picker that can somehow beat the market? Spoiler alert, you probably can’t! In fact, when you factor in fees and taxes, many of the funds that beat the market end up delivering below-market returns to the investors. Fees matter. Taxes matter. Index funds minimize both!

2 – Passive Index Investing is Low Cheap

Investing $500 per month into the US stock over a 50-year investing career can turn into $2.44 million at 7% annual returns. 

If a mutual fund or actively managed ETF charges you a 1% fee, and your annual return drops to 6%, you’ll end up with $1.74 million. That 1% fee, costs you $660,000 dollars. Yikes. 

Luckily the fee wars between large brokerage firms like State Street, Vanguard, Schwab, and Fidelity have been driving down annual expense fees and trade fees for everyday investors like you. It’s never been easier and cheaper to invest in the markets.

How cheap is cheap? Vanguard charges 3 basis points to invest in VOO or VTI. So you pay an annual fee of 0.03% times the amount you have invested. 

So if you $1,000,000 invested you pay only $300 bucks a year! What a world we live in. 

3 – Diversification with a single purchase

With a single investment, you can become a shareholder in hundreds or even thousands of companies. With a single button click, every overpaid CEO in America now works for you! All these smart and fancy executives are working to make you rich. That’s pretty special. 

Eliminate the risk of picking a stock that goes out of business but simply owning a basket of stocks that represent the entire US stock market. The crazy reality is that most stocks stink. 

50% of the US stock market wealth creation has come from 0.33% of the listed companies since 1926. 

86 of the 26000 companies listed in the CRSP database of common stocks account for 50% of the stock market returns! For a real nerdy read check out the paper by Hendrik Bessembinder, a professor at Arizona State University. 

If you ever needed data to never pick a single stock ever again, I think that’s it.

Detailed Comparison: VTI vs VOO

So which ETF do you pick in order to get exposure to the US equity market?

Let’s compare these two well-known and highly liquid investments from the Vanguard family of funds.

Data as of 3/31/2020

VTI vs VOO comparison

As I mentioned, the fee to the investor is the same for both choices. While the assets under management are almost larger for VTI, VOO provides plenty of liquidity for individual investors. 

The top 10 holdings for each ETF is the same, and the dividend yield is slightly higher for VOO.

The biggest difference is the number of stocks in the basket. VTI has 3535 compared to VOO’s 508. Wait I thought it was the S&P 500, not the S&P 508? The people of Wall Street lying to themselves yet again 🙂

Historical Performance

(Jan 2011 – Dec 2019) 

The time period is constrained to the last 9 years since VOO was created on 09/07/2010

VTI vs VOO trailing returns

As you can see the performance difference is minimal. Since VOO tracks the 500 largest companies in America, it tends to be slightly less volatile than the entire market, which includes mid and small-cap stocks. You’d be a slight winner if you picked VOO for this time period, but you’re far from a loser if you picked VTI. 

Which ETF should you pick?

Either one! They’re both fantastic choices to capture the returns for the US stock market. 

In the end, you really can’t make the wrong choice

Picking between these 2 ETFs isn’t going to materially change your life. Your ability to earn, save, and invest your money is what matters most. Struggling to make this decision is a real first-world problem. If you’re really having a hard time with it, flip a coin. Do what the coin tells you and you’ll be fine. 

People are often their own worst enemies and decision paralysis can be a problem. I suspect this is why Vanguard removed the S&P 500 as an investment choice from their employee’s 401(k) plan! Or maybe these guys know something that we don’t. Hmm, perhaps picking VTI and investing in the Total Market Index is the way to go. 

If your 401(k), IRA, or brokerage account doesn’t have these vanguard ETFs don’t sweat it. Here are some great alternatives to pick from. Again, don’t sweat the small stuff here. 

Other great choices

  • ETF Ticker: SPY 
    • Brokerage Firm: State Street
  • ETF Ticker: IVV 
    • Brokerage Firm: iShares by Blackrock)
  • ETF Ticker: SCHX
    • Brokerage Firm (Charles Schwab)

Buy the market, keep buying the market, and try not to micro-manage your investments.