Summary: The VTI and VTSAX are both funds that track the investment return of the overall U.S stock market. The VTI is an exchange traded fund with no minimum investment and a .03% expense ratio. It trades as an ordinary stock would. The VTSAX is a mutual fund with a $3,000 minimum investment and a .04% expense ratio. You can purchase fractional shares of VTSAX, making it easier to automate investments or reallocate your portfolio.
The VTI is good for investors that don’t want to commit large amounts of money. The VTSAX is good for investors that want all of the benefits of a mutual fund.
VTI is an exchange traded fund and VTSAX is a mutual fund. Both funds are sold by Vanguard and index the entire U.S stock market. The underlying portfolio contains over 3,500 stocks. That’s a lot! For context, the S&P 500 contains only 500 stocks and the Dow Jones contains a whopping 30 stocks. So why would any investor want such a diverse portfolio like VTI/ VTSAX? Two reasons:
1. If you can’t beat it, join it.
All investment managers literally want one thing and it’s disgusting: superior returns over the stock market. That’s a lot harder to do than it seems. Less than 5% of investment managers manage to beat the market. So don’t try to beat it, just follow it. VTI/VTSAX is a good indicator of the stock market as a whole: its return is positive in a bull market and negative in a bear market/recession. As of December 30th, 2019, Yahoo Finance reports a 27.11% YTD return for VTI and a 27.16% YTD return for VTSAX. That’s insanely good.
2. Reducing risk.
When you’re holding a portfolio with containing over 3,500 stocks, the performance of one or two companies will barely make a difference. Even if Netflix or Tesla were suddenly snapped out of existence, the VTI/VTSAX portfolio would average out those losses over its other holdings. The overall impact to the fund would be relatively small. Similarly, the effects of credit risk or political risk that only impact a subset of the market are not as large. The only way that the VTI/VTSAX performs badly is if the U.S stock market as a whole performs badly, as it does during bear markets and recessions.
In short, VTI/VTSAX are funds that can help capture high returns during bull markets and cushion against non-systematic risks. They can be a great addition to a portfolio. But which one is right for you? That depends on how much you want to invest and what you’re looking for in a fund.
VTI
VTI is an ETF (Exchange Traded Fund) with no minimum investment and a .03% expense ratio. It trades when the market is open, as any stock normally would. VTI’s price varies based on market momentum. It can trade at a premium or discount to the underlying portfolio’s net asset value. VTI has a slightly smaller expense ratio than VTSAX, but the difference is insignificant unless at low dollar amounts.
VTSAX
VTSAX is a mutual fund with a $3,000 minimum investment and a .04% expense ratio. Mutual funds are priced once per day, at close of market, and trade at the NAV (Net Asset Value) of the underlying portfolio. Although VTSAX requires a higher upfront investment, it allows for fractional shares. For example, say you invest $3,000 in VTSAX at $79.45 per share. You would own $3,000/$79.45 = 37.76 shares of VTSAX. This isn’t possible with VTI: the max you could invest would be 37 shares, leaving $60.35 in uninvested cash.
In short, VTSAX is thus a better fit for investors that want to automatically invest some dollar amount from their paychecks or for investors that want to regularly reallocate their portfolios. VTI may be better for beginner investors that want to test the waters with a small investment and less expenses.
If you’re ready to start purchasing funds, but you’re not sure which brokerage to use, I recommend Charles Schwab or TD Ameritrade (which announced a merger in late 2019). You can check out my review here.