VTSAX Vs. VFIAX: Which One Is Better? - Radical FIRE (2023)

Looking for investments with lower risk in the long run? An index fund can be a great addition to your portfolio. In this article, let’s find out the similarities, differences, and which index fund is better when we compare VTSAX vs. VFIAX.

Before investing, many investors and traders conduct the needed due diligence. A sound investment strategy includes diversification of your asset classes so that you manage your risk and maximize your profits.

This is all good, but how do you really know which exchange-traded fund (ETF) can provide you with a high yield? And are these investment options in line with your current investment portfolio? Which mutual fund can give you the best growth potential, diversification, and dividends yet is within your risk tolerance?

Let’s discuss a specific investment fund you may consider as part of your investing strategies and financial goals.

What Is An Index Fund?

An index fund is a type of mutual fund that tracks or matches the features of the financial market index, such as the S&P 500. The fund follows a benchmark index no matter how good, or bad the market may be. An index mutual fund, therefore, offers broad exposure to the market.

Index funds can be a good holding in a stock portfolio. One of their advantages over individual stocks is that they are more diversified, reducing the risk for investors. They can also be a good way of making tax-advantaged passive income.

Once investors put their money in an ETF, they can forget about it and simply wait for their returns. Passive investing is an ideal and historically effective way to increase your investment returns as part of your portfolio management.

While there are thousands of ETFs, two of the most popular investment funds globally are The Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and the Vanguard 500 Index Fund Admiral Shares (VFIAX). While these two can work as a core holding in an investor’s stock portfolio, they follow different investment strategies.

In addition, most investors don’t notice how big the largest S&P 500 is compared to the other stocks. For instance, as of September 2021, the top 10 VFIAX holdings consisted of 22.7% of the whole fund.

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VTSAX Vs. VFIAX – Similarities

Here are the similarities between the two funds:

Investment style

Both types of funds are large blend funds. This means that they combine a portfolio of value and growth stocks. With blended funds, investors can diversify into the two types of investment styles.

Classifications

Both funds can be classified into two categories: the Investor Shares and the Admiral Shares. The main difference between the Investor and Admiral Shares lies in the minimum amount required for investment and expense ratio for each category.

For Admiral shares, these represent a different class of mutual funds for Vanguard. Only a select group of mutual fund shares is offered with a minimum amount of investment valued at $3,000. Admiral shares also offer lower fees compared to the standard Investor Share-class Vanguard funds. The expense ratio for Admiral Shares ranges from 0.04% to 0.45%, with an average ratio of 0.14%.

For Investor Shares, they offer Vanguard mutual funds with a minimum initial investment of $3,000, but they do allow a $1,000 initial investment for some cases. Meanwhile, the expense ratio for Investor Shares is a bit higher and ranges from 0.09% to 1.80%, with an average ratio of 0.27%.

Both classes hold similar returns as a big part of their holdings are in the same companies. However, the investor shares in both funds have been closed for investment.

Market Capitalization-Weighted Indexes

VFIAX is a subgroup of VTSAX. In fact, VFIAX consists of 1/7th of the VTSAX stocks. The Vanguard 500 Index Fund Admiral Shares consists of 509 VTSAX stocks and 3,128 smaller stocks. The 3,128 stocks are referred to as the small and mid-capitalization stocks in the S&P 500 index fund.

It’s worth noting that VTSAX provides its investors diversified exposure to the different capital growth and value stocks traded on the Nasdaq and New York Stock Exchange (NYSE). Since its inception, this mutual fund has historically performed for an annual average return of 8.42%, almost identical to the fund’s benchmark.

All the stocks held in VFIAX are in VTSAX, but these mutual funds pursue different investment strategies for their investors. As we have already seen, VTSAX has an additional few thousand stocks. Both of them represent similar core baskets consisting of individual stocks. Both funds are available as exchange-traded funds (ETFs).

Other similarities between the two include:

• Expense ratio: 0.04%
• More than 20 years of historical returns
• Settled cost of the trade after hours
• Big blend holding category
• Similar top 10 holdings

As the name suggests, VTSAX focuses on the whole US equities market covered by the Center for Research in Security Prices (CRSP) Total Market Index, consisting of close to 4,000 stocks. The ETF offers a diversified exposure on the small, medium, and large-capitalization value and growth stocks traded on the Nasdaq and the New York Stock Exchange.

The fund was created in November 2000. Since its inception, it has averaged an annual return of 8.43% as of September 2021. In other words, the fund has been averaging the benchmark, the CRSP US Total Market Index. The fund uses a sample approach to estimate the whole index and its characteristics.

As of the end of July 2021, the fund had 3,908 stocks and net assets of $1.3 trillion. Its largest holdings are in companies that are in technology, financial, healthcare, industrial, and consumer service.

The expense ratio of VTSAX is extremely low as it’s only 0.04%. The minimum investment of the fund is $3,000. The low nature and wide exposure of the fund have made it the most popular fund in the world.

VFIAX provides exposure to a subset of the entire country’s equity market. It tracks the S&P 500 and seeks to replicate its benchmark index of comparing the returns on investment and only focuses on the top 500 companies in the United States.

Since VFIAX has a well-diversified portfolio with the big-capitalization market segment, the index fund is an excellent option for investors who would like to hold as their core equity holding in the portfolio.

The expense ratio of VFIAX is the same as VTSAX, which is 0.04%, with the minimum investment of $3,000 available as an ETF.

VTSAX Vs. VFIAX: Key Differences

Like we have already seen, the main difference between VTSAX and VFIAX is the target index they track. VTSAX tracks the total market index, giving exposure to the equity market in the US. The equity market in the US consists of small, medium, and large-capitalization value and growth stocks. It, therefore, provides exposure to the biggest companies in the US. These companies account for about three-quarters of the value of the US stock market.

On the other hand, the Vanguard Total Stock Market Index Fund (VFIAX) has slightly lower volatility and returns than the VTSAX. However, both funds have an almost similar Sharpe ratio (a commonly used method for calculating the risk-adjusted return).

This is an indication that investors in both funds enjoy similar returns when the risk is adjusted.

The VFIAX is more suitable for investors who are either moderately or highly risk-tolerant and seeking low-cost exposure to the stock market. It can also work well as one single domestic equity fund in the portfolio.

The VTSAX is a good choice for core equity-holding investors who want to focus on the long-term investment horizon and love the lower risk associated with the large-capitalization equity market. Since it doesn’t concentrate on just the large-cap stock, the fund works better in a diversified portfolio with exposure to other equity types that can be used for growth.

VTSAX Vs. VFIAX: Composition Differences

VFIAX consists of the biggest 500 publicly traded companies in the United States. The index has 509 stocks as some companies have more than several classes of stocks. For instance, Berkshire Hathaway has both class A and class B shares.

But with the largest 500 stocks making the biggest impact, the additional 3,128 stocks don’t make a huge difference because the stocks are usually small compared to the biggest S&P 500 stocks.

The top VTSAX and VFIAX holdings are the same stocks but only differ in percentage. The ten stocks are more than 27% of VFIAX and 22.4% of VTSAX stocks. Therefore, if there are changes in the top 10 stocks, these will affect VFIAX more than VTSAX.

The top 10 VTSAX and VFIAX holdings are:

1. Apple
2. Microsoft Corporation
3. Amazon
4. Alphabet
5. Facebook
6. Tesla
7. Berkshire Hathaway
8. JP Morgan Chase & Co.
9. Johnson & Johnson
10. Visa

Therefore, the biggest difference between the two indices is in their composition. But because of the market capitalization weight nature, the funds have a similar composition.

VTSAX Vs. VFIAX: Performance Differences

Both indices have very similar returns. In some decades, the S&P 500 outperformed the others better, while the stock market performed better in others. This is not surprising considering give their similar composition.

The historical return of VTSAX for the past 10 years is as follows:

• One-year: 35.39%
• Three-year: 17.14%
• Five-year: 16.67%
• Ten-year: 16.26%

The historical returns of VFAX are as follows:

• One-year: 33.21%
• Three-year: 16.19%
• Five-years:16.46%
• Ten-year: 16.03%

VTSAX Vs. VFIAX: Fees

High fees can kill your portfolio. A fee of 2% versus that of 0.04% can result in a big difference in your portfolio after 20 years.

One of the benefits of the two indices is that their fees are incredibly low. Both of them also have an incredibly low expense ratio of 0.04%. So management fees are something you should consider also.

VTSAX Vs. VFIAX: Which One Is Better?

There is no doubt that both VTSAX and VFIAX are good choices as mutual funds when considering a long-term index fund. While VTSAX offers excellent exposure to the whole stock market, VFIAX only gives exposure to the biggest companies in the stock market. Like you may have noted, both of them have the same structure in their top 10 holdings. Both of them also have almost similar returns.

Investors with the goal of attaining financial independence by the time they get to the retirement age can choose either VTSAX or VFIAX. Both of them are good investments that a good and reputable company backs. They are almost indistinguishable, and they can both serve investors well. To invest in either one of them will be beneficial for anyone’s investment objective.

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