Is VTI Better Than SPY?

A fog of uncertainty still shrouds the market’s outlook. Against this backdrop, investors might opt for exchange-traded funds (ETFs), which mimic the broader stock market while weathering volatility better than investing in single stocks.

To that end, we look into Vanguard Total Stock Market Index Fund ETF Shares (NYSEARCA:VTI) and SPDR S&P 500 ETF Trust (NYSEARCA:SPY) to compare their key attributes.

Both funds have gained more than 30% over the past year but how will they fare going forward? After all, the Fed kept rates at the same level and reinforced its forecast of three rate cuts this year despite an inflationary uptick and expectations of a strong economy.

Vanguard Total Stock Market Index Fund ETF Shares (VTI)

Since its inception in 2001, the Vanguard Total Stock Market Index Fund has tracked the returns of the CRSP US Total Market Index, which comprises small, mid, and large-cap diversified equities.

The fund is most appropriate for investors with a long-term investment horizon and comprises 3,731 stocks. It has approximately $1.50 trillion in total net assets.

The average annual earnings growth rate for the stocks in the ETF’s portfolio over the past five years is 15.6%.

A key selling point for the fund is its very low expense ratio of just 0.03%, considerably lower than the average expense ratio of similar funds of 0.79%.

The Vanguard Total Stock Market Index Fund has a significant portion (32.30%) of its holdings dedicated to the technology sector. This is followed by the consumer discretionary (14.50%), industrials (13%), healthcare (12%), and financials (10.70%) sectors.

Its top holdings include six of the “Magnificent 7” stocks: Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL), NVIDIA Corporation (NASDAQ:NVDA), Amazon.com, Inc. (NASDAQ:AMZN), Meta Platforms, Inc. (NASDAQ:META), and Alphabet Inc. (NASDAQ:GOOGL). Together, they account for over 20% of the fund’s weighting.

In 2023, the fund’s net investment income increased 12% from the prior year to $20.82 billion, while its realized net gain came in at $24.99 billion, up more than 340% from the prior year.

The Vanguard Total Stock Market Index Fund pays a quarterly distribution of $0.9105 per share. At prevailing prices, its annual dividend rate of $3.41 yields 1.31%. Income investors will find it attractive but not reason enough to buy the exchange-traded fund.

These dividend payouts have grown at CAGRs of 7.2% and 5.6% over the past three and five years, respectively.

SPDR S&P 500 ETF Trust (SPY)

SPDR S&P 500 ETF mimics the price and yield performance of the S&P 500® Index.

Since its inception in 1993 as the first ETF listed in the U.S., the trust has become one of the most heavily traded funds, appealing to investors with a long-term focus who prefer diversification over single stock risk. The float-adjusted market cap weighted fund gives exposure to the large-cap segment of the U.S. equity market.

With $535.19 billion in assets under management (AUM), the fund also has an attractive gross expense ratio of 0.0945%.

With 1.03 billion shares outstanding, it holds 503 stocks and has an estimated 3 to 5-year EPS growth rate of 13.71%.

Following the index, the SPDR S&P 500 ETF has a significant portion (29.88%) allocation to the Information Technology sector. This is followed by Financials (13.13%), Healthcare (12.26%), and Consumer Discretionary (10.37%) sectors.

Like the Vanguard Total Stock Market Index Fund, six of the “Magnificent 7” stocks are part of the trust’s top 10 holdings. Microsoft is the largest holding, followed by Apple, NVIDIA, Amazon.com, Meta Platforms, and Alphabet. These stocks account for more than 25% of the fund’s weighting.

For the fiscal year ending September 2023, SPDR S&P 500 ETF’s total investment income increased by 9% year-over-year to $6.33 billion, while net investment income rose by 9% from the prior year to $5.97 billion.

The trust pays quarterly dividends and is set to pay a quarterly distribution of $1.594937 on April 30. Its annual dividend of $6.72 has a fund distribution yield of 1.29% on prevailing prices.

SPDR S&P 500 ETF has increased its dividend payouts at a CAGR of 6.5% over the past three years and 5.1% over the past five years.

Is VTI Better Than SPY?

VTI is a better buy than SPY because it has a lower expense ratio, higher dividend yield and more holdings than SPY.

Both ETFs provide significant diversification benefits to investors who want to navigate a volatile market backdrop with a buy-and-hold strategy. 

To sum up the benefits:

1. Vanguard Total Stock Market Index Fund has more holdings than the SPDR S&P 500 ETF, providing exposure to more companies and greater diversification benefits.
2. Vanguard Total Stock has a higher dividend yield than SPDR S&P 500. Moreover, its dividend payouts have increased faster over the past three and five years.
3. Vanguard Total Stock has a price/book of 4.0x, lower than SPDR S&P 500’s 4.53x.
4. VTI has a lower expense ratio of 0.03% versus 0.0945% for SPY.

It’s worth noting that comparing VTI to SPY might be akin to comparing two luxury automobiles. They both perform very well and achieve their objectives, so it’s hard to go too far wrong with either one. 

Largely, it’s a matter of marginal differences between the pair of exchange-traded funds that leads an investor to select one over the other. It’s probably fair to say that SPY has the bigger brand name but VTI, while flying a little under the radar of the average investor, offers a bit more bang for your buck.

When compared to the volatility a portfolio will likely undergo if composed of single stocks only, the selection of either SPY or VTI is more than adequate for the needs of the vast majority of investors.

Those who want to risk a little more in order to make a little more will find picking individual stocks still necessary as both VTI and SPY aim to track the market average, not necessarily beat it. Equally, neither will underperform the market averages by much at all, other than perhaps the marginal cost of fees.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.