By Jamie Johnson, WCI Contributor
Index funds are one of the smartest long-term investment strategies you can utilize. An index fund is a collection of stocks that attempts to mirror an existing index, like the S&P 500. For that reason, index funds are a passive investment strategy and require little active involvement.
The Vanguard S&P 500 Index ETF (VOO) and the iShares Core S&P Total US Stock Market ETF (ITOT) are two popular index funds in which many people invest. Both are large funds and a staple in many investment portfolios. Both are exchange-traded funds (ETFs), which means they can easily be purchased or sold on a stock exchange similar to stocks. If you’re considering investing in ITOT or VOO, we'll explain how the two funds compare so you can determine which is the best fit for your situation.
What Is ITOT?
The iShares Core S&P Total US Stock Market ETF (ITOT) tracks the performance of the S&P Composite 1500 Index. This index gives you access to the entire US stock market in a single fund.
It has a low expense ratio of 0.03%, and it's a good way to diversify your portfolio and grow long-term wealth. Here are the top 10 performing stocks in ITOT:
- Apple Inc.
- Microsoft Corp.
- Amazon.com Inc.
- Nvidia Corp.
- Alphabet Inc. Class A
- Alphabet Inc. Class C
- Tesla Inc.
- Meta Platforms Inc. Class A
- Berkshire Hathaway Inc. Class B
- Exxon Mobil Corp,
ITOT invests most heavily in the following sectors:
- Information technology (26.41%)
- Financial (13.10%)
- Healthcare (13.04%)
- Consumer discretionary (10.83%)
More information here:
How Do You Evaluate and Compare Mutual Funds and Exchange Traded Funds?
What Is VOO?
The Vanguard S&P 500 Index ETF (VOO) is a low-cost index fund that invests in all the companies that make up the S&P 500. It has a 0.03% expense ratio, making it one of the least expensive index funds in which to invest.
Here are the top 10 performing stocks in VOO:
- Apple Inc.
- Microsoft Corp.
- Amazon.com Inc.
- Nvidia Corp.
- Alphabet Inc. Class A
- Tesla Inc.
- Facebook Inc. Class A
- Alphabet Inc. Class C
- Berkshire Hathaway Inc. Class B
- UnitedHealth Group Inc.
And VOO invests most heavily in the following sectors:
- Information technology (28.10%)
- Healthcare (13.10%)
- Financials (12.60)
- Consumer discretionary (10.60%)
ITOT vs. VOO: What’s the Difference?
As you can see from the chart below, there are many similarities between ITOT and VOO. Both are considered large blend funds, they track the same sectors, and their top-10 performing stocks are nearly identical. And both are passive ETFs so they aren’t actively managed.
Here are the biggest differences between the two funds:
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- Underlying index: VOO tracks the S&P 500, which tracks the largest publicly traded companies in the country. In comparison, ITOT tracks the investment results of a broader index composed of US equities.
- Diversification: Since VOO focuses on large-cap US stocks, you’ll gain exposure to large companies across a variety of sectors. But since ITOT includes a wider range of market caps, you’ll gain exposure to smaller companies with higher growth potential.
- Risk: Since VOO focuses on larger more established companies, it comes with fewer risks than ITOT. But you may miss out on potential growth opportunities as well.
- Performance: The performance of any ETF depends on the results of the index it’s tracking. Historically, the S&P 500 has delivered strong long-term performance, and it's considered a benchmark for the overall stock market. However, both funds have delivered similar year-to-date returns. In the last five years, ITOT has seen slightly higher returns, but in the past decade, VOO has had a slightly better performance.
More information here:
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The Bottom Line
Since there are so many similarities between ITOT and VOO, you’ll likely only need to invest in just one of them. The index fund that’s best for you will depend on your investing strategy and long-term financial goals.
If you want to diversify your portfolio a bit more, ITOT may be the better option. But VOO may be the better choice if you want to avoid risk and invest in larger, more stable companies. It’s always a good idea to do plenty of research and consider speaking to a financial advisor about your investing options.
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