Vanguard Total Stock Market (VTSMX) and Vanguard S&P 500 (VFINX) are both suitable as core holdings in your stock portfolio. The VTSMX index fund provides exposure to the entire US stock market, whereas the VFINX index fund provides exposure only to five hundred of the largest US companies. Of course, there are differences between these two approaches. Nevertheless, the best approach for you greatly depends on the makeup of your stock portfolio. Which is why knowing the differences between VTSMX vs VFINX becomes very important. Below, we will see the comparisons between VTSMX and VFINX to help you decide which one to choose.
About Vanguard Total Stock Market Index Fund
The VTSMX index fund provides diversified exposure to various stocks traded on NASDAQ and New York Stock Exchange (NYSE). There are micro, small, mid, and large-cap stocks here. The mutual fund was issued for the first time on 27 April 1992, and it has gained an average annual return of 9.03% as of 30 September 2015. It charges an expense ratio of 0.17% as of 28 April 2015, which makes it lower than the average expense ratio of other mutual funds with similar investments. Nevertheless, a minimum investment of $3,000 is required to invest in this mutual fund.
The VTSMX index fund, in order to provide exposure to the entire US stock market, implements an indexing strategy and also tracks the performance of the underlying index, the CRP US Total Market Index. It uses a representative sampling approach in order to approximate the entire index and the key characteristics.
In general, the VTSMX index fund is best for moderately or highly risk-tolerant investors who seek low-cost exposure to the US stock market. In addition, this fund is suitable for a core equity holding in a diversified asset portfolio. You can also use it as a single domestic equity fund in your portfolio.
About Vanguard S&P 500 Index Fund
On the other hand, contrary to the VTSMX, the VFINX only provides exposure to a subset of the entire US stock market. It provides exposure to the top five hundred largest companies in the US stock market. It aims to track the general price and performance of the Standard & Poor’s 500 Index (S&P 500 Index). One of the differences between VTSMX vs VFINX is that the VFINX seeks to replicate the benchmark index by investing all of its total net assets substantially in the stocks comprising the index and also by holding each component with about the same weight as the index.
The VFINX index fund tends to experience slightly lower volatility and return over a period of time compared to the VTSMX index fund. Even so, the Sharpe ratios still indicate that, on a risk-adjusted basis, the investors of this fund still get similar returns.
Generally speaking, the VFINX index fund is suitable for investors with a long-term investment horizon who seek diversified exposure in the large-cap stock market. Due to its specialized exposure, it should be held in a diversified portfolio.
Differences in Composition
As said above, VTSMX encompasses a wider universe than VFINX, but the difference between VTSMX vs VFINX here is not exactly as great as you think. In fact, about 75% of VTSMX is made up by the stocks of VFINX. So, the overlap is very considerable. But, then again, the 25% of the total stock market contains smaller stocks that do give greater diversification. If you are an investor who already has small-cap exposure elsewhere in your portfolio, the mid- and large-cap VFINX may suffice. However, if you are looking for a broader one-stop-shopping fund, you should go with the total stock market index fund which gives the maximum diversification within the US stock universe.
Also, note that VFINX is not a purely cap-determined index. There is a committee of economists and analysts who maintains the index. They may exclude companies for various reasons, for example if a company is considered no longer financially viable, either because of ongoing losses, because the stock is not sufficiently liquid, or because the stock throws the index’s sector balance.
Nevertheless, VFINX stocks are widely available, which means that it is relatively easy to track the index. On the other hand, the total stock market indexes include some of the smallest publicly traded issues that are cost-prohibitive to buy and sell. In order to minimize the added trading cost, VTSMX employs the representative sampling method so that it doesn’t have to trade every stock in it.
In terms of performance, the difference between VTSMX vs VFINX is not very different. The VTSMX index fund tends to have lower performance within one year – a time period when small caps lagged large caps. However, in a longer time frame, when small caps have outperformed large caps, the VTSMX index fund tends to perform better.
Still, volatility needs to be taken into our consideration. After all, small-cap stocks are relatively bumpier than large-cap stocks. While VFINX has a ten-year standard deviation of 15.6, VTSMX has 16.1. So, by including the smaller stocks, the total stock market also increases its volatility and risk, albeit only slightly.
Last but not least, consider the availability of these index funds in question. VFINX has better availability because this mutual fund is composed of large companies’ stocks. On the other hand, VTSMX is less prevalent because it includes some of the smallest publicly traded issues that are cost-prohibitive to trade.
Some investors may be limited by what is available on their employer-based retirement plans. If you have a retirement plan that only offers an S&P 500 index fund, you may want to add a small-cap fund to create better diversification.
|- Provides exposure to the entire US stock market||- Provides exposure to the top five hundred in the US stock market|
|- Slightly higher volatility, better performance in the long run||- Slightly lower volatility, better performance within the first year|
|- Less prevalent due to some of the smallest publicly traded issues||- Relatively better availability|
|- Best for moderately or highly risk-tolerant investors who seek low-cost exposure to the US stock market||- Suitable for investors with a long-term investment horizon who seek diversified exposure in the large-cap stock market|
Both VTSMX and VFINX are great for investors who are interested in utilizing a passive investment strategy in order to own a broad, diversified collection of US stocks. You should choose VTSMX if you already have mid-cap or large-cap stocks in your portfolio in order to create better diversification or if you prefer a one-stop-shopping solution. You may also choose VTSMX if you can accept increased volatility and risk for increased performance. On the other hand, VFINX is the way to go for investors with already diversified portfolios who are seeking diversified exposure in the large-cap stock market.