By Eric Rosenberg, WCI Contributor
If you like saving and investing for retirement with Vanguard, you’re in good company. Vanguard is one of the largest fund management companies in the world with a total of $7.5 trillion in assets under management spread across 410 different mutual funds and exchange-traded funds (ETFs). More than 30 million customers invest with Vanguard, likely drawn in by a simple, low-cost fee structure and its leadership in the index fund industry. Here’s an in-depth look at two of Vanguard’s most popular mutual fund offerings, VFIAX and VTSAX, to determine which one is the right choice for broad market investors.
Here's what you should know about both funds.
What Is a Broad Stock Market Mutual Fund?
Broad market mutual funds are a fund category where investors share ownership of a large basket of stocks. While some mutual funds target specific investment categories and themes, broad market funds give you a little bit of everything across a large cross-section of the stock market.
Financial companies create indices of different groups of stocks to track how markets perform. Tracking these indices is a specialty at Vanguard, and it was the first company to offer retail index funds when created by its pioneering CEO John Bogle.
Broad market index funds offer the benefit of instant diversification. While actively managed mutual fund managers earn high salaries for trying to beat the markets, the indices, in most cases, outperform active funds and other stock pickers over time. When you can buy 500 or more stocks with a single purchase and with very, very low fees, you’ve likely found a winning foundation for an important cornerstone of your retirement portfolio.
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What Is VFIAX?
VFIAX is a large blend mutual fund made up of the same 500 stocks included in the S&P 500 list. This fund is officially named Vanguard 500 Index Admiral Shares and is ideal for long-term investments, thanks to an incredibly low 0.04% annual expense ratio. Investors need at least $3,000 to buy in. If you’re more into ETFs, this one is nearly identical to the Vanguard S&P 500 ETF (VOO), with an even lower 0.03% expense ratio and no minimum required investment.
While the markets certainly have their ups and downs, the S&P 500 index has performed very well historically, offering an average of about 10% annual returns (5.95% 2023 YTD). That’s due to its underlying assets, consisting of the stocks of 500 of the largest publicly traded companies in the United States.
As of this writing, an investment in VFIAX 10 years ago would have returned an average of 12.21%. However, the one-year return was hardly above zero. As the saying goes, “time in the market beats timing the market,” so long-term investors are still doing well despite a drop in stock prices in 2022.
Warren Buffett compared a low-cost S&P 500 investment to an investment in the American economy. If you think US large companies will do well financially over time, the S&P 500 in the form of the Vanguard 500 index fund, should be on your radar.
What Is VTSAX?
VTSAX, short for Vanguard Total Stock Market Index Fund Admiral Shares (that’s a mouthful!), is another index mutual fund tracking a blend of large companies from the US. The expense ratio is 0.04%, and it requires a minimum $3,000 investment. The ETF version is VTI, the Vanguard Total Stock Market ETF, with a 0.04% expense ratio and no minimum.
The big difference between this fund and the one above is the number of stocks and which stocks are included in the index. The VTSAX index includes 3,945 stocks, more than eight times the number you get with VFIAX.
VTSAX performance is highly correlated with VFIAX performance. The 10-year returns are nearly identical across the two indices. However, the one-year results are worse, showing the risk of including a larger group of companies outside of what is arguably the 500 most stable in the country.
However, that added diversification could help you, as the broader investment is more likely to capture up-and-coming growth stocks than the S&P 500 would. Again, this index and mutual fund are a good choice for long-term investment goals, like saving for your kids' college education or your retirement.
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VFIAX vs. VTSAX: Which Should I Choose?
I’m invested in both of these indices, and there’s no rule saying you can’t buy both. But if you’re looking to zero in on just one or you want to adjust the balance of your portfolio, here’s a side-by-side comparison of the most important stats and features of VFIAX and VTSAX:
*Source—Vanguard.com. Data accurate as of March 31, 2031.
As you can see, these funds have a lot more in common than they don’t. And no surprise, one big group of US stocks performs very similarly to another large group of US stocks. The difference is that VFIAX is focused on the biggest 507, while VTSAX includes a broader 3,945 stocks.
If you’re unsure which makes more sense for your portfolio, consider working with a trusted financial advisor who can guide you in the right direction for your unique investment goals.
VFIAX vs. VTSAX: Which Is Better?
These two Vanguard mutual funds are tried and tested market winners. The Vanguard 500 is the oldest index fund in existence, introduced in 1976, but that doesn’t make it a better fund than the Total Stock Market version. They’re very similar in most regards, and they are likely to offer similar results for your portfolio in the long term.
One might argue that VFIAX is a little less risky due to its concentration in bigger companies, insulating it from some negative economic events. But that difference is slim. Neither VFIAX nor VTSAX is significantly better or worse than the other. It’s up to you to decide what you're looking for out of a mutual fund or if perhaps a combination of both is the best option for your investment needs.
Dr. Jim Dahle, the founder of The White Coat Investor, lists VTSAX as his favorite mutual fund. It makes up 25% of his portfolio. While he admits there is very little performance difference between the two funds in the long run and almost perfect correlation, he likes the additional diversification (including into smaller companies with higher historical returns). He also likes that the total market index cannot be “front-run” in the same way that the S&P 500 can.
In some ways, the S&P 500 index is actively managed, and using a total stock market fund allows you to be just a little more passive. However, given the high correlation between these funds (as well as the Vanguard Large Cap Index Fund) they all make for excellent tax-loss harvesting partners for each other in a taxable account.
Which fund do you prefer? Have you had better luck with one than the other? Or do you prefer other kinds of low-cost index funds with other brokerages? Comment below!