Well, you probably have understood that VTSMX is a mutual fund whereas VTI is an ETF. However, what’s the matter with that? What is the difference between VTSMX vs VTI? What are the advantages and disadvantages of each of them? In the following article, we will discuss the key differences between VTSMX and VTI, along with the reasons to choose VTSMX or VTI. So, continue reading below to decide the best way to invest your money!
You will be surprised by how similar VTSMX vs VTI actually are. There are just a few differences that set them apart. However, such differences can be quite important for some people.
VTSMX stands for Vanguard Total Stock Market Index Fund. It tracks the CRSP US Total Market Index. It is a mutual fund designed to provide investors the exposure to the entire US stock market. Note that the index does cover virtually all investible US stocks, and that the fund is classified into Morningstar’s large-blend category.
Furthermore, VTSMX is quite consistent and promising. In Morningstar’s large-blend category, it places in the 50th percentile for the last twelve months; in the 30th percentile for the last three years; and in the 28th percentile for the last five years. A placement in the first percentile is considered the best, whereas a placement in the one-hundredth percentile is considered the worst.
VTSMX has a low expense ratio, which is only 0.15%. However, the minimum initial investment is $3,000, which is pretty high compared to some other choices in the index fund space. There is an “admiral” version for bigger investors called VTSAX (see also: VTSMX vs VTSAX) which offers a much lower expense ratio of 0.04%, but with a minimum initial investment of $10,000. The risk is categorized as average, and the level return is above average for the last three, five, and ten years relative to the other competitors.
On the other hand, VTI stands for Vanguard Total Stock Market ETF. This investment aims to track the performance of a benchmark index which measures the investment return rate of the overall stock market. This ETF employs an indexing investment approach, which is designed to track the performance of the CRSP US Total Market Index (which is considered to represent approximately 100% of the investible US stock market, including micro-, small-, mid-, and large-cap stock traded regularly on the NYSE and Nasdaq). VTI invests by sampling the index; which means, it holds a highly diversified collection of securities whose aggregate approximates the full index’s key characteristics.
VTI is an open-ended fund. Since it is a passive index fund, it has an outstandingly low expense ratio of 0.05% – which about 95% lower than the average expense ratio of similar funds. Such low expense ratio is beneficial for long-term investments. The turnover rate is also very low at 2.9%, which means there are limited transaction costs for changing the holdings. Nevertheless, don’t forget that the expense ratio doesn’t include any commission/brokerage fee.
The Key Differences
VTSMX and VTI are essentially the same thing; they both offer the same underlying portfolio of securities, a representative selection of the whole US stock market. However, here are the few key differences of VTSMX vs VTI.
First of all, VTI has a lower expense ratio than VTSMX (0.05% vs 0.17%). Well, if you have a lot of money to invest in the admiral version of VTSMX, you should just go with the admiral version, since the expense ratio is lower. However, if you don’t have enough money to invest in the admiral version, you probably should just buy the VTI, whose expense ratio is lower without requiring a huge amount of initial investment.
VTI is traded in the open market like a stock, so you can trade VTI at any time whenever the NYSE is open. Hence, VTI is traded very often, usually millions of shares per day. You won’t need to worry about liquidity issues or bid/ask spreads. An ETF usually requires you to pay a commission fee to buy or sell, but Vanguard has waived commissions on their own ETFs. It is traded within a brokerage account.
On the other hand, as a mutual fund, VTSMX is traded only once a day, which is after the closing of the NYSE. You buy and sell shares directly from Vanguard, rather than the open market. All orders placed before the cut-off time (usually 04:00 PM EST) are traded in the same day. It is traded in a regular mutual fund account.
When to Choose VTSMX
So, when should you choose VTSMX vs VTI? In general, there are two things that may make you prefer VTSMX. First of all, if you want to be able to automatically repeat specific transactions, you should choose VTSMX. It will enable you to set up automatic investments and withdrawals into and out of the mutual fund according to your preferences. On the other hand, an ETF like VTI does not allow you to make automatic investments and withdrawals.
The second reason to choose VTSMX is if you are certain that you have (or will have) enough money to get to the admiral version. Once you invest enough money, you will be automatically moved to the admiral version, which has an even lower expense ratio.
When to Choose VTI
There are two reasons to choose VTI. First of all, you should choose VTI if you prefer lower investment minimums and lower expense ratios. If you don’t have a lot of money, VTI makes an excellent choice. You will enjoy a very low expense ratio without having to invest too much in the first place.
The second reason to choose VTI is if you want to have more control over the price of each trade. A mutual fund like VTSMX will give you the same price as everyone else regardless of the time of the order placement. The price is only calculated after the trading day is over. On the other hand, VTI has a real-time pricing, and it also allows you to use more detailed order types so that you can have the most control over the prices. Even if you want to keep things simple, you can stick with a market order to get the best current price without much complexity.
|- Higher minimum investment||- Lower minimum investment|
|- Higher expense ratio (unless you upgrade to the admiral version)||- Lower expense ratio|
|- Traded once a day after the closing of the NYSE||- Traded like a stock in the open market|
|- The price is calculated only after the trading day is over||- Real-time pricing with sophisticated order types|
|- Allows automatic investments and withdrawals||- Doesn’t allow automatic investments and withdrawals|
VTSMX and VTI are similar that they both provide a representative selection of the whole US stock market. However, VTSMX is more suitable for people who want to automatically repeat specific transactions. On the other hand, VTI is great if you prefer a lower investment minimum with more control over the price of each trade, as it has a real-time pricing and sophisticated order types.