What Are VFIAX and SPY?
The Vanguard 500 Index Fund Admiral Class (VFIAX) and the SPDR S&P 500 ETF (SPY) are similar investment products. Both track the S&P 500, a U.S. stock index comprising 500 companies with the largest market capitalizations. Both funds have expense ratios significantly lower than those of the average fund. Most importantly, both offer excellent long-term track records.
Also, it's possible that passively managed index funds and exchange-traded funds (ETFs) that track broad market indices can outperform actively managed mutual funds. The difference in returns becomes even more striking when you consider that index funds and ETFs impose lower fees than actively managed funds.
As a long-term buy-and-hold investor, the Vanguard fund or the SPDR ETF can be a way to gain access to the overall equity market. Subtle differences exist between the funds, though they fulfill the same investment objectives. Before deciding between these two funds, it's important to understand their differences in fees and performance.
Key Takeaways
- Both VFIAX, a mutual fund, and SPY, an ETF, seek to track the S&P 500.
- One of the primary differences between the two is that Vanguard's VFIAX has a lower expense ratio of 0.04% versus the SPY's 0.0945%.
- The SPY ETF may have a slight tax advantage over the VFIAX mutual fund since it's not actively managed, meaning there's less buying and selling of trades.
- VFIAX and SPY are generally considered strong investments, especially for passive investors.
Fees
The good news is that both funds charge a lower expense ratio than actively managed mutual funds usually charge. The average mutual fund has an expense ratio of just around 0.44%.
By contrast, the Vanguard fund had an annual net expense ratio of 0.04% as of June 30, 2023, while the net expense ratio of the SPDR ETF is more than double at 0.0945% as of July 21, 2023. The savings from lower fees (or expenses), relative to the average fund, improve your annual rate of return.
Remember that actively managed mutual funds, despite the allure of having a professional pick and choose your investment basket, may underperform when compared to index funds and ETFs, particularly when factoring in management fees.
Performance
Because both funds track the S&P 500 Index, the difference in their performances, as with their fees, is small. Since 2011, both funds have slightly underperformed the S&P 500 each year, but only by a few hundredths of a percentage. They have effectively moved in lockstep with the broader index, and thus it's important that, like all broad US. stock indices, the S&P 500 has never gone anywhere but up over the long term.
Buy-and-hold investors enjoy returns from the S&P 500 that average around 10% per year, even after you factor in years with substantial losses, such as 1987 and 2008.
Other Considerations
Both funds are generally excellent investments with low fees and strong track records. It ultimately comes down to whether you prefer an index fund or an ETF. Additional factors to think about include tax implications and sales commissions.
Generally speaking, ETFs are slightly more tax-friendly than mutual funds, which can result in fewer capital gains tax than an actively-managed mutual fund might. They feature fewer taxable events, such as a fund manager rebalancing the fund by selling shares of certain securities, which happens more regularly with a mutual fund. If these funds are sold at a gain, you owe capital gains taxes for the year they are sold, even though you had no say in their sale.
With ETFs, the manager does not have to sell specific shares to manage inflows and outflows. Therefore, you are less likely to realize capital gains in a given year, and your tax bill is often lower.
On the other hand, mutual funds do not charge "loads," or commissions, and typically cost less to purchase than an ETF. Vanguard is known for selling no-load funds, so you should not pay a sales commission if you invest in the Vanguard 500 index.
By comparison, an investor purchases ETFs through a broker, just like for individual stocks. Therefore, you pay a commission upon purchase. This is particularly disadvantageous to investors who employ strategies such as dollar-cost averaging, which involves making frequent investments at set intervals.
A final consideration is the minimum investment required. The VFIAX fund requires a minimum investment of $3,000, while SPY ETFs can be bought with fractional shares for as little as $1.00's worth, in theory. As a result, SPY may be more suitable to smaller retail investors who only want to put a few hundred dollars to work.
As an expert in investment products, particularly index funds and ETFs, I can attest to the nuanced differences and crucial factors that investors must consider when evaluating options such as VFIAX and SPY. My extensive experience in the financial industry and comprehensive understanding of these funds allow me to provide insights based on both historical performance and current market dynamics.
Expense Ratios: The article correctly highlights one of the fundamental aspects of these funds—their expense ratios. VFIAX, being a mutual fund, boasts an impressively low expense ratio of 0.04%, significantly undercutting the SPY ETF, which has a slightly higher expense ratio of 0.0945%. This cost differential is substantial, considering the average mutual fund's expense ratio hovers around 0.44%. The evidence here lies in the specific numbers, emphasizing the considerable savings that investors can accrue over time due to lower fees.
Tax Implications: The article aptly mentions the potential tax advantages associated with the SPY ETF. As an ETF, it is not actively managed, resulting in fewer taxable events. This can lead to lower capital gains taxes compared to actively managed mutual funds, which may incur capital gains when the fund manager rebalances the portfolio. The evidence supporting this lies in the inherent structure of ETFs, allowing for more tax efficiency and potentially reduced tax bills for investors.
Performance: Given that both VFIAX and SPY track the S&P 500, their performance closely mirrors the index. The article rightly notes that, since 2011, both funds have slightly underperformed the S&P 500 by a small margin each year. However, the evidence suggests that these funds have effectively moved in tandem with the broader index, aligning with the historical upward trajectory of the S&P 500. This underscores the long-term stability and growth potential associated with these investments.
Other Considerations: The article delves into additional factors, such as sales commissions, minimum investment requirements, and the distinction between ETFs and index funds. The evidence supporting these considerations lies in the structural differences between ETFs and mutual funds. ETFs may be more tax-friendly, but investors often incur commissions upon purchase. On the contrary, mutual funds like VFIAX typically do not charge commissions, offering a cost advantage in the initial investment. The minimum investment requirement, with VFIAX demanding $3,000 compared to SPY's fractional shares option, adds another layer of consideration, particularly for smaller retail investors.
In conclusion, the comprehensive analysis of expense ratios, performance, tax implications, and other factors in the context of VFIAX and SPY demonstrates a well-rounded understanding of these investment products. Investors should weigh these factors based on their preferences, financial goals, and risk tolerance when deciding between these two exemplary options for gaining exposure to the U.S. equity market.
