A coworker recently asked me about saving for her child’s college education. We talked about how stocks are a great way to build wealth over decades. Looking to keep things simple, we turned to a discussion about index investing and two great options: VFIAX vs. VOO.
Here we’ll explore VFIAX vs. VOO and how either one might be a good foundation for your long-term stock portfolio.
Related: VTSAX vs. VTI: Which One is Better & What’s the Difference?
VFIAX vs. VOO Overview
The Vanguard 500 Index Fund Admiral Shares (VFIAX) is a mutual fund that aims to track the 500 largest US stocks.
Here is a summary from the Vanguard site:
As the industry’s first index fund for individual investors, the 500 Index Fund is a low-cost way to gain diversified exposure to the U.S. equity market. The fund offers exposure to 500 of the largest U.S. companies, which span many different industries and account for about three-fourths of the U.S. stock market’s value. The key risk for the fund is the volatility that comes with its full exposure to the stock market. Because the 500 Index Fund is broadly diversified within the large-capitalization market, it may be considered a core equity holding in a portfolio.
Basically, if you own shares VFIAX, you own a small piece of every single one of the largest 500 companies across the US stock market that is tracked in the index. This creates very broad diversification.
The Vanguard SP 500 ETF (VOO) is an exchange-traded fund (ETF) that also aims to track the entire US stock market.
Here is the product summary of VOO from the Vanguard site:
- Invests in stocks in the S&P 500 Index, representing 500 of the largest U.S. companies.
- Goal is to closely track the index’s return, which is considered a gauge of overall U.S. stock returns.
- Offers high potential for investment growth; share value rises and falls more sharply than that of funds holding bonds.
- More appropriate for long-term goals where your money’s growth is essential.
Despite ETFs being a newer product than mutual funds, Vanguard created VOO in September 2010 (vs. VFIAX which Vanguard created in November 2010; however, Vanguard created the original SP 500 Index – which was also the first-ever Index fund – in 1976).
Similar to VFIAX, if you own shares of VOO, you get exposure to every US company within the stock index.
Similarities between VFIAX vs. VOO
Here are some of the things that VFIAX and VOO have in common.
Portfolio and Holdings
From a stock selection perspective, VFIAX and VOO are identical. Both are designed to track the same index of US stocks.
The top 10 stocks are the same, as are their weighting in the index.
They track the same number of stocks and share the same characteristics.
VFIAX and VOO also track the same US stock market sectors of the economy and in the same percentages.
Performance
Performance is nearly identical when reviewing VFIAX vs. VOO.
Although both VFIAX and VOO have the same identical holdings, VFIAX performed slightly better than VOO in terms of overall performance in the 1-year category and practically the same in the 3-, 5-, and 10-year categories.
How is this possible that two identical investments have the same but slightly different performance?
Expenses.
We’ll cover that in further detail coming up.
Differences between VFIAX vs. VOO
Despite being similar investment options, here are some of the things that VFIAX and VOO don’t have in common.
Liquidity
While not extensively different, both VFIAX and VOO are very liquid compared to non-listed securities, such as Real Estate – a long-term, illiquid investment.
As an ETF, VOO is slightly more liquid, as you’re able to buy and sell at any price point during open market hours.
If you enter an order to buy or sell VFIAX, comparatively, your order will get processed after market hours at the same price as anyone else who entered a buy or sell order during the day.
This is the case for all mutual funds such as VFIAX.
Share Price
As mutual funds are only pricing at the end of the trading day, VFIAX’s net asset value (NAV), or share price, is struck after the market closes.
Comparatively, since VOO is an ETF, the share price changes throughout the day and is priced in real-time.
Minimum Investment and Fees
With VOO’s slightly lower expense ratio of 0.03% vs. VFIAX’s 0.04%, VOO is slightly cheaper.
As we saw above, this isn’t necessarily a huge difference in cost, but it is a consideration.
Over 10 years for every $10,000 invested, here is how much you would pay in fees:
- VOO = $71
- VFIAX = $95
In this regard, VOO will save you more money over the longer term – even if both investments are identical and performed exactly the same.
Lower costs make a difference.
As for minimums, you can invest in:
- VOO for the price of 1 share
- VFIAX with a minimum of $3,000
While both are relatively accessible investments,
VOO requires less capital than VFIAX in order to invest.
What else should you consider before investing in VFIAX vs. VOO?
Assuming stocks are a good fit for your long-term portfolio, here are some things to consider.
Account Type & Tax Efficiency
Both VFIAX and VOO have low turnover rates. This means the list of securities in the index or benchmarks that they track don’t change frequently because of the need for lower trading. This increases tax efficiency.
If you’re not able to utilize a retirement or other tax-advantaged account, both of these investments will be good candidates to hold in a taxable brokerage account if they meet your investment objectives.
In comparison, assets that might be taxed as ordinary income, such as a bond fund or Real Estate Investment Trusts (REITs) are generally less tax efficient and should ideally be held in a tax-advantaged account.
Related: Land(less) Landlording: How and Why We Use REITs
Liquidity
Despite purchases and sales of VFIAX being only available at the end of the trading day (vs. VOO that can be bought or sold throughout the trading day), there really isn’t much difference here.
Both VFIAX and VOO are publicly-traded securities that should generally be accessible if you need to sell and access the cash – depending on your account type.
Obviously, the question of whether or not you should do so is an entirely different matter.
Related: 5 Ways to Balance Account Types To Balance Life’s (Un)known Milestones
Risk Tolerance
VFIAX and VOO both offer investors exposure to the 500 largest companies in the U.S. stock market.
Compared to individual stocks that come with much higher risks (though also the potential for higher returns), the index approach of VFIAX and VOO spans the vast majority of the U.S. stock market from a market capitalization perspective.
Despite this broad diversification, the stock market certainly contains volatility that can swing dramatically in any period of time (whether from hours to years). VFIAX and VOO are no exception.
What percentage of your portfolio and how long you should be invested in stocks is also another consideration.
Related: 3 Lessons Why Assumption Is The Mother of All F*ck Ups
Other Investment Objectives and Timeline
Related to risk, you need to consider the purpose or objective of your investment dollars. Why are you investing in the stock market? Among other things to consider:
- How long until you need the money?
- Are you able to risk losing your capital?
- Why are you investing this money?
- Is there a specific purchase you intend to make?
You likely shouldn’t be investing your money in VFIAX or VOO, or stocks, in general, if you’re intending to use or access the specific funds within the next couple of years.
What happens if there is a massive downturn when you intended to use the money you invested? Utilizing a proper asset allocation and asset type is important.
Both VFIAX and VOO should be considered long-term investments.
Regardless of the VFIAX vs. VOO discussion,
non-US, or international stocks, are also not captured by either investment.
You’d need to utilize a different mutual fund or ETF for international or non-US stock exposure. Bonds and other asset types are another consideration for your wider portfolio and investment needs.
VFIAX vs. VOO summary – which one is better?
With VOO’s slightly lower expense ratio of 0.03% vs. VFIAX’s 0.04%, VOO appears to be better considering the holdings and other characteristics of the two are practically identical.
As we saw above, this isn’t necessarily a huge difference in cost, but it is a consideration.
I also found I don’t check my portfolio constantly throughout the trading day if I know the price won’t change intraday if I’m invested in a mutual fund.
Overall, both VFIAX and VOO provide investors with an inexpensive way to gain broadly-diversified exposure to the entire US stock market.
Either VFIAX or VOO can provide a solid foundation for your long-term portfolio.
Readers, do you own VFIAX or VOO in your portfolio? If so, which one? Do you generally prefer ETFs or mutual funds?
Related:
How I Got to Averaging $1,000 a Month in Passive Income
M1 Finance: Why I Transferred My IRA From Vanguard
MoneyMade: Passive Income & Investment Ideas
“What Is This Crap?” Clean Up Your Stock Watchlist
Our favorite free financial tool is Personal Capital. We use it to track our net worth, manage our spending & savings, and to monitor our investments. It’s simple and free to use.
With your two articles now on Vanguard, it appears the main differences seem small, and in the areas of liquidity and expenses. Does this hold true through most of the portfolio offerings? BTW, both articles very well written, clear and very detailed.