The U.S. stock market currently comprises around 60% of the world by market-cap weight, so its not surprising that most investors have a heavy U.S. allocation in their portfolio.
When it comes to tracking the U.S. market, there are two schools of thought. The first one is going all-in on the S&P 500 index, an approach favored by the "Oracle of Omaha" Warren Buffett himself.
The second is the "buy the haystack" mentality endorsed by John Bogle, the late founder and Chairman of Vanguard, which suggests that investors buy the entire U.S. stock market.
To put this into play, investors can use two low-cost index ETFs from Vanguard: The Vanguard S&P 500 ETF (VOO) and the Vanguard Total Stock Market ETF (VTI) respectively.
Both ETFs have massive amounts of assets under management (AUM) and a very low 0.03% expense ratio, but have some slight differences that could confuse novice and advanced investors alike.
Here's an in-depth analysis and breakdown of both ETFs head-to-head for your convenience!
VTI vs VOO: Index Composition
VOO is pretty simple to understand. The ETF tracks the S&P 500 index, a widely referenced benchmark of 500 large-cap U.S. companies selected by an S&P committee. It's considered the single best gauge of overall domestic market performance and is widely cited in financial media.
The S&P 500 has been around since 1957, and its underlying companies currently account for around 80% of the U.S. market's capitalization. For those interested, the index's actual methodology in all its detailed glory can be found here on S&P Global's website.
Now, the S&P 500 by no means does it comprises the entire U.S. stock market. That honor goes to the CRSP US Total Market Index, which in addition to tracking the the 500 large-cap companies in the S&P 500 also holds another 3,400-ish mid, small-cap, and micro-cap stocks.
As it stands, the CRSP US Total Market Index represents 99% of the total investable U.S. market. Its security selection process is far more passive than the S&P 500 as there is no committee deciding which constituents to admit or boot from the index.
Practically speaking though, both indexes are functionally identical in terms of sector and style exposure. Both are diversified across all 11 GICS market sectors in roughly the same proportions and score similarly on the equity stylebox as "large-cap blend".
VTI vs VOO: Historical Performance
Let's end by looking at how VTI and VOO have fared historically relative to others. Keep in mind that this backtest is hypothetical in nature, does not reflect actual investment results and is not a guarantee of future results. It also does not account for trading commissions and bid-ask spreads. We'll also be using VTI and VOO's mutual fund equivalents to extend the backtest longer in time.
The trailing returns are functionally identical. VOO slightly outperformed, but the difference is so small that it could just be noise. It's also worth noting that large-cap stocks went on a tear during the years preceding the dot-com bubble and the last decade.
If we look at the rolling returns, which are less sensitive to start dates, VTI has pulled ahead consistently over longer periods of time, whether in terms of high, average, or low returns. This is consistent with its higher exposure to the size risk factor – we expect to get compensated with better returns by taking on the risk of small-cap equities.
VTI vs VOO: The Verdict
In my opinion, it’s a coin toss. If you like the name-brand recognition of the S&P 500 and want to stick to large-caps, then VOO might be the better option. If you don't mind some mid and small-cap exposure, then VTI could be a good pick. Investors can potentially also use both as tax-loss harvesting pairs.
Either way, the market-cap weighted nature of both indexes means that both ETFs will likely continue to perform similarly moving forward. If mid and small-cap stocks have an explosive year, VTI might beat VOO by a few basis points. Vice-versa, another streak of large-cap dominance will see VOO win slightly.
In short, either ETF will provide an investor with palpable and accurate exposure to the risks and returns of the U.S. equity markets, with low fees, minimal tracking error, and low portfolio turnover. With either, making consistent contributions, reinvesting dividends, and staying course will help ensure success.
