As an investor, it makes sense for you to diversify your portfolio. After all, when it comes to your hard-earned money, it is never prudent to put all your eggs in one basket. Portfolio diversification reduces investment risks to a considerable extent. Investing across different instruments and different industries offers peace of mind by shielding your portfolio from market volatility.
Also, portfolio diversification is strongly advised for a new investor looking to make an initial investment. Diversification helps to keep the investment safe by minimizing the investment risk to the maximum possible extent.
Some experts suggest that investors invest in low-cost mutual funds or ETFs. A report by Longboard Capital Management reveals that the number of stocks underperforming considerably exceeds the number of overperforming stocks. While investing in a single stock can be extremely risky, investing in an index fund can significantly negate the overall impact of market volatility.
Both, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – a mutual fund – and Vanguard Total Stock Market ETF (VTI) – an ETF – are Vanguard’s Total Stock Market Index funds, which can help investors keep their capital safe by helping them spread their investments across different asset classes.
What is an Index fund?
An index fund is a portfolio of stocks or bonds that follow popular market indices such as the S&P 500, Russell 2000 Index or the NASDAQ 100.
Different index funds adopt different approaches to investing. When you invest in an index fund, the cash is either used to invest in all of the companies included in a market index, or invested in chosen securities that make up the particular index. Either way, they help you to keep risk levels minimized relative to reward by diversifying your portfolio.
Let’s use the S&P 500 as an example. S&P 500 is one of the major indexes that tracks the performance of 500 largest companies in the U.S. Investing in an S&P 500 fund (one of the most popular) means the overall risk is automatically lowered versus any given stock as the investment is now diversified. Index funds as such generally outperform individual stocks on average over time, while mitigating investment risk to a considerable extent.
How to invest in Index funds?
Index funds have fund managers whose job it is to make sure that the performance of the index fund mirrors that of the index.
Investing in an index is basically a three-step process.
- Pick the index (S&P 500, Nasdaq Composite, Russell 2000 among others).
- Choose an index fund that tracks the index you have chosen.
- Buy shares in your chosen index fund through platforms such as Vanguard, Merrill Lynch, and Fidelity among others.
In fact, Vanguard is the platform that offers the two funds that are the topic of this article: VTI and VTSAX. These two funds are designed to minimize your time researching individual stocks, help you to invest with less risk, provide diversification and allow you to pay less in taxes (relative to some mutual funds that have surprising tax consequences).
What Is VTI?
The Vanguard Total Stock Market ETF (VTI) is a well-diversified exchange-traded fund that seeks to track the performance of the CRSP U.S. Total Market Index.
An exchange-traded fund (ETF) is a basket of securities (stocks, commodities, or bonds) that trade on an exchange akin to a stock. ETFs are passively managed, which means the fund manager’s role is largely restricted to making sure that the returns closely mimic those of the benchmark index.
VTI, which came into existence in 2001, is a market capitalization-weighted index, which represents approximately 100% of the investable U.S. stock market. It includes small-, mid-, and large-cap stocks regularly traded on the New York Stock Exchange and NASDAQ. The fund is managed in a passive manner and remains fully invested at all times.
VTI holds over 4,100 stocks in its portfolio. Technology is the top sector with a total weightage of around 28%. Second in line is the consumer discretionary sector with a weighting of close to 16%. The industrial care sector comes third.
Apple, Microsoft, Alphabet, Tesla and Amazon are its top four holdings. The fund has a low expense ratio, and closely tracks the broader stock market, and as such it offers a good opportunity to investors or traders to obtain comprehensive exposure to the U.S. equity market.
VTI Holdings
Holdings represent the total contents of an investment portfolio. The level of diversification in a portfolio is determined by the number and types of holdings it contains.
VTI’s Top 10 Holdings
| Company | Symbol | Total Net Assets |
| Apple Inc. | AAPL | 5.54% |
| Microsoft Corp. | MSFT | 5.30% |
| Amazon.com Inc. | AMZN | 3.22% |
| Tesla Inc. | TSLA | 1.96% |
| Alphabet Inc. Cl A | GOOGL | 1.83% |
| NVIDIA Corp. | NVDA | 1.66% |
| Alphabet Inc. Cl C | GOOG | 1.65% |
| Meta Platforms Inc. | FB | 1.65% |
| Berkshire Hathaway Inc. Cl B | BRK.B | 1.02% |
| JPMorgan Chase & Co. | JPM | 1.01% |
Fund’s Characteristics
| Number of stocks | 4156 |
| Fund total net assets | $1.3 trillion |
| Net assets of 10 largest holdings | 26.0% |
| Foreign holdings | 0.1% |
| Sector Allocation |
| Technology | 29.12% |
| Financials | 16.11% |
| Consumer Services | 13.16% |
| Industrials | 11.58% |
| Health Care | 11.25% |
| Consumer Goods | 8.26% |
| Oil & Gas | 2.78% |
| Utilities | 2.28% |
| Basic Materials | 1.99% |
| Non Classified Equity | 1.78% |
ETF’s largest 10 holdings constitute 26.00% of total net assets
Does VTI Pay a Dividend?
Dividends are important for investors who need additional periodic income. ETFs that offer a dividend are a good source of passive income as they help investors secure a relatively stable cash flow.
In fact, there are several benefits of investing in a dividend ETF. First and foremost, a single investment gives you exposure to numerous dividend stocks. It also allows you to minimize your time spent researching individual dividend stocks. Furthermore, dividend ETFs are a low-cost investment option.
The Vanguard Total Stock Market (VTI) ETF granted a 1.51% dividend yield in 2021.
Vanguard ETFs receive interest or dividends from their investment in bonds and stocks, which they give out to their investors to meet their investment company tax status. Exchange-traded funds (ETFs) are required to pay out the full dividend collected from securities held in their funds. They are free to distribute the dividend as cash, or in the form of additional shares of the ETF.
The majority of Vanguard’s 70-plus ETFs pay dividends. However, the frequency varies between different ETFs as some pay quarterly dividends; some pay dividends on an annual basis, while a few pay monthly dividends.
ETFs can pay two types of dividends – qualified dividends and non-qualified. The former is taxed at the long-term capital gains rate, and the latter is taxed at the investor’s ordinary income tax rate.
Top Vanguard Dividend ETFs
Some of the highest paying Vanguard dividend ETFs are:
- High Dividend Yield ETF (VYM)
- Dividend Appreciation ETF (VIG)
- International High Dividend Yield ETF (VYMI)
- Utilities ETF (VPU)
- Real Estate ETF (VNQ)
VTI Expense Ratio
One of the more unique features of Vanguard funds, in general, is they are known in the fund industry for expense ratios that are lower than average. As of September 2021, Vanguard ETFs’ net expense ratio ranges between 0.03% and 0.28%,1 while the average expense ratio as of December 2020 is about 0.06% for a typical Vanguard ETF.
An ETF’s expense ratio indicates how much in fees you have to pay to fund managers with respect to your total investment in ETF. For example, if the expense ratio is 1%, then for an investment of $100,000, the total fee that investors are charged by an exchange-traded fund (ETF) will be $1,000. The total fees you have to pay will keep on increasing if the value of your investment continues to grow.
Coming back to VTI, one of the important features of Vanguard funds is that their expense ratio on an average is comparatively less than its peers. Vanguard is generally known for being one of the fund industry’s low-cost leaders. In fact, VTI is reportedly cheaper than 96 per cent of competing funds. The company works hard towards maintaining its reputation on the cost front by continuously indulging in fee reductions.
The expense ratio of the Vanguard Total Stock Market ETF is 0.03%, while the average expense ratio of similar funds is 0.82%. Another way of saying that is Vanguard will charge $3 on a $10,000 investment.
What is VTSAX?
The Vanguard Total Stock Market Index Fund (VTSAX), launched in 1992 is one of Vanguard’s most popular offerings. Vanguard is the largest mutual fund provider in the U.S.
Important features of the fund includes low costs, extensive diversification, and the potential for tax efficiency. VTSAX is a mutual fund designed to offer diversified exposure to the entire U.S. equities market, as represented by the Center for Research in Security Prices (CRSP).
The index covers virtually all U.S. investible stocks, consisting of small-cap, midcap, and large-cap growth and value stocks traded on the Nasdaq and New York Stock Exchange (NYSE).
As its name implies, the Total Stock Market Index Fund provides exposure to the entire U.S. equities market, comprising of over 4,100 publicly traded companies. The fund employs a representative sampling approach to approximate the entire index and its key characteristics.
As of the end of last year, the fund had assets totaling almost $300 billion. The fund offers an extremely low expense ratio of 0.04 per cent and requires a minimum investment of $3,000.
The fund’s top holdings are in Apple, Microsoft, Amazon.com, Tesla, and NVIDIA. The fund has returned 26 per cent over the past year, 17.55 per cent over the past five years and 15.95 per cent over the past decade.
VTSAX TOP HOLDINGS:
| Holdings | % Portfolio Weight |
| Apple Inc. | 5.54 |
| Microsoft Corp. | 5.3 |
| Amazon.com Inc. | 3.22 |
| Tesla Inc. | 1.96 |
| Alphabet Inc. Class A | 1.83 |
| NVIDIA Corp. | 1.66 |
| Alphabet Inc. Class C | 1.65 |
| Meta Platforms Inc. Class A | 1.65 |
| Berkshire Hathaway Inc. Class B | 1.02 |
| JPMorgan Chase & Co. | 1.01 |
Sector Weightings
| Sector | % Stocks |
| Basic Materials | 2.34% |
| Communication Services | 10.03% |
| Consumer Cyclical | 12.16% |
| Consumer Defensive | 5.52% |
| Energy | 2.83% |
| Financial Services | 13.69% |
| Healthcare | 13.32% |
| Industrials | 9.02% |
| Real Estate | 3.62% |
| Technology | 25.2% |
| Utilities | 2.28% |
Does VTSAX Pay Dividend?
Generated income is sometimes reinvested back into the investment, which leads to long-term returns. But some investors wish to receive periodic income from their investments for regular flows.
Mutual funds following a dividend reinvestment plan reinvest the money back into the stocks while others pay out dividends either monthly, quarterly or sometimes half-yearly.
As such, for investors looking for a steady stream of income, dividend-paying mutual funds could be a better option than individual stocks, as a mutual fund will aggregate dividends from multiple stocks. Depending upon the local tax laws, dividend income may be taxable or tax-free.
Dividend funds are paid out after fees, which means the best dividend mutual funds generally have low expense ratios and high yields.
Since VTSAX contains over 4,000 stocks traded on US exchanges – most of which pay dividends—an investor receives dividends.
Vanguard Total Stock Market Index Fund current dividend yield is 1.22%. The dividends are paid quarterly.
How Is VTI Different From VTSAX
Is VTI A Good Investment? Both VTI and VTSAX are owned by The Vanguard Group, which is the second-largest investment firm in the world, after BlackRock. The Malvern, Pennsylvania-based company provides investment management and advisory services with more than $7 trillion in global assets under management.
Here are a few important reasons why the Vanguard Total Stock Market Funds like VTI and VTSAX are so popular:
- Broad Diversification
- Very low expense ratio
- High-level tax efficiency
- A track record of reliable average rate of return
- A reputation of quality
- Passively managed fund
With over $1 trillion in total net assets, Vanguard’s Total Stock Market funds (VTSAX and VTI) are the most popular investment funds on the planet.
VTSAX (Vanguard Total Stock Market Index Fund Admiral Share) is a mutual fund with a 0.04% expense ratio and a minimum investment of $3,000. It trades after the market closes which means there’s going to be no price fluctuations during trading hours.
VTI (Vanguard Total Stock Market is an exchange-traded fund (ETF) with an expense ratio of 0.03% and a minimum investment of one share is required, and can be traded like stock during market hours.
VTSAX and VTI are likely to provide the same returns because they both track the same CRSP U.S. Total Market Index, and also hold the same diversified portfolio of stocks. Major points where these two differ are their expense ratio, the minimum initial investment requirement, and the way they trade during or after market hours.
VTI vs. VTSAX: Similarities and Differences
Is VTSAX the Best? Having fleetingly talked about the similarities and differences between these two funds, it’s time now to compare them in some depth.
Minimum Investments
There is a significant difference between the two funds when it comes to minimum initial investment. For VTSAX, the minimum investment stands at $3,000, which is definitely on the higher side. In sharp contrast, VTI can be invested in for the price of a single stock, which despite fluctuations could be as low as $150.
VTSAX and VTI are virtually the same investment, but VTSAX is the most popular amongst the personal finance community, because of its fairly reliable average rate of return.
Moreover, investors are likely to prefer VTSAX if they meet the minimum requirement because of the benefit of automatic investing. In the case of automatic investing, also known as dollar-cost averaging, funds are automatically deducted from an individual’s personal account at pre-specified intervals.
So VTSAX offers a kind of assurance to investors who know their investment is accumulating and growing towards their long-term goals. Systematic, or regular, investing can help investors take advantage of changing market conditions by eliminating hesitancy associated with investing in declining markets – a time when stocks can be brought at discounted prices.
Real-Time Pricing
VTI offers real-time pricing per share, meaning VTI is traded much like an individual stock, on a per-share basis during market hours. Investors as such are aware of the trading price of VTI when the market is in session.
In contrast, VTSAX is traded as a mutual fund where the transaction is settled at the end of the trading day when the market closes at 4 p.m. ET. It means investors become aware of the official price of VTSAX only at the end of the trading session.
Another important thing to note is that in the case of purchasing VTSAX: an investor will pay the same price as any other investor irrespective of the time of the day. However, in the case of VTI, an investor may have to pay a different price depending upon the time of the day the order is placed.
In other words, for an investor in the habit of trading quickly and frequently, VTI could be the preferred choice. On the other hand, investors interested in holding their investment fund for a longer period, could choose VTSAX.
Automatic Withdrawals and Investments
VTSAX offers the facility of automatic investing meaning a certain amount of money is automatically deducted from your (investor’s) bank account and invested in the mutual fund. On the other hand, you have to manually add investment in VTI.
For example, if your salary is $4,000 per month, and you wish to invest $500 each month, irrespective of whether the market is rising or in the decline, you can do that with VTSAX, and not VTI. VTSAX, as such, is also a more convenient investment option.
In contrast, investors looking to remain in control of their investment all the time might prefer VTI.
| VTSAX | VTI |
| Vanguard Total Stock Market Index Fund | Vanguard Total Stock Market (VTI) ETF |
| 0.04% Expense ratio | 0.03% Expense ratio |
| Minimum investment of $3,000 | 1 Share minimum investment |
| Trades at market close | Trades during market hours |
| Same price all day | Real-time price |
| Investment added automatically | Investment to be manually added |
Other important features of VTI and VTSAX
In addition to the above, a couple of other important features of VTI and VTSAX are discussed as follows:
Transparency
VTI, like any other ETF, is quite transparent about its portfolio holdings, as investors can get all the desired information on a freely accessible website.
On the contrary, VTSAX is a mutual fund, and as such is obligated to report its standing quarterly. However, even this reporting comes with a 30-day lag.
Capital Gains tax for VTSAX and VTI
Profits made on selling securities that have been appreciated in value are generally taxable. However, in case of both VTI and VTSAX, the tax levied is comparatively lower. A few reasons for it are listed as follows:
- As far as VTI is concerned, an investor can sell ETFs to another investor, instead of redeeming them like a mutual fund. When an authorized participant (AP) redeems shares of an ETF directly from the issuer, the issuer can give the AP the shares of the underlying stock. This does not technically qualify as a sale, and hence the question of capital gains does not arise.
- VTSAX also is known for its tax efficiency. The reason for it is that the parent company Vanguard Group, Inc. has found a way of eliminating taxes on their mutual funds through a practice called ‘heartbeat trading’. A tax code enacted by a Democratic senator and signed into law by a Republican president is increasingly being exploited by savvy traders in the $4 trillion U.S. ETF market. So-called “heartbeat trades” occurs when a mutual fund honors a redemption by giving appreciated shares of stock to an investor instead of cash. The absence of cash, as such, eliminates the possibility of capital gains tax. This in turn offers investors greater returns which keep compounding.
Converting from VTI to VTSAX
VTSAX requires a minimum initial investment of $3,000. Some investors may not have that kind of money. What they can do is to keep investing in VTI, and then transfer it to VTSAX once the balance reaches the $3,000 mark. This movement from VTI to VTSAX should not trigger any taxes, though always consult with your tax advisor on such matters.
VTSAX vs VTI: The Similarities
Both VTI and VTSAX are total stock market index funds and offer investors diversified exposure to the entire U.S. equities market i.e., investors can invest in every individually publicly traded stock in the United States.
Both these low-cost index funds, thanks to their low-fee natures and broad array of holdings, are excellent options for maximum possible exposure to the entire U.S. stock market.
VTSAX vs VTI Expense Ratios
Both funds are known for their extremely low expense ratios. VTSAX’s expense ratio is 0.04% and VTI’s expense ratio is 0.03%.
Holdings VTI vs VTSAX
These funds are made up of over 4,100 stocks with top holdings in some of the biggest corporate names.
Some top corporations that make up the majority equity of these funds include:
- Apple Inc.
- Microsoft
- Facebook Inc.
- Amazon.com Inc.
- NVIDIA Corp
- Berkshire Hathaway Inc.
- JPMorgan Chase
- Johnson & Johnson
- Tesla
VTSAX vs VTI FAQs
What is the full name of VTI?
The full name of VTI is Vanguard Total Stock Market ETF.
What is the full name of VTSAX?
The full name of VTSAX is Vanguard Total Stock Market Index Fund Admiral Shares.
When was VTSAX created?
VTSAX was created in 1992
When did VTI come into existence?
VTI came into existence 9 years after VTSAX in 2001.
What is the ETF equivalent of VTSAX?
The ETF equivalent of VTSAX is VTI.
What is the mutual fund equivalent of VTI?
The mutual fund equivalent of VTI is VTSAX.
Are VTI and VTSAX the same?
They are similar in most aspects, with differences in expense ratios and minimum initial investment criteria.
Does VTSAX or VTI pay a dividend?
Yes, they do both pay dividends.
Which is more tax-efficient, VTSAX or VTI?
VTI and VTSAX both allow investors to save taxes because of Vanguard substantial reliance on so-called heartbeat trades.
VTSAX vs VTI – The Final Verdict
Does VTI Outperform VTSAX? VTSAX and VTI are more or less the same, which means an investor can be well-served by investing in either of these Vanguard funds. Owning any of these funds is hardly going to make any significant difference in outcome in the long haul.
VTSAX and VTI are just a few of the many ways to own a slice of the U.S. economy, as these index funds provide diversified exposure to the entire U.S. equities market. These quality investments offered by one of the best investment companies possess full capability to help you achieve financial independence in the long run.
ETF Vs Mutual Fund Investing
Mutual funds and exchange-traded funds (ETFs) share quite a few similarities. Both consist of a broad set of assets and offer investors an excellent opportunity to diversify.
Despite a few parallels, they also have some key differences. An ETF can be bought and sold like any other normal stock during market hours, which means the price can keep fluctuating the whole day. Mutual funds on the other hand can only be purchased at the end of each trading day based on a calculated price known as the net asset value.
Also, mutual funds have been in existence for long, with the first mutual fund launched in 1924. ETFs in contrast are relatively new, having made their debut in 1993.
Another key difference, that has become quite irrelevant these days though, is that mutual funds were actively managed, meaning fund managers played an active role in buying and selling of securities. ETFs are generally passively managed and track market indices or specific sector indices.
However passive index funds make up a significant proportion of mutual funds’ assets under management these days, while the number of actively-managed ETFs available to investors is continuously growing.
Also, mutual funds have a higher expense ratio than ETFs, reflecting the time, effort and manpower associated with active management of the fund. Also, mutual funds come with a higher minimum initial requirement in comparison to ETFs.
Mutual funds are either open-ended or close-ended. In the case of open-ended funds, the trading is directly between the investors and the fund company. Also, there’s no limit to the number of shares the fund can issue. Close-ended funds issue a specific number of shares, and new shares are not issued to keep up with the growing demand.
ETF Creation and Redemption
The creation/redemption process of ETFs acts as a primary differentiator from other investment vehicles. This also provides a number of benefits. Creation encompasses the process of purchasing all the underlying securities that make up the ETF and then subsequently bundling them into the ETF structure.
Redemption as the name suggests involves unbundling the ETF back into its individual securities. Since an ETF redemption involves ETF shares being exchanged for the underlying securities, ETFs are less likely to attract capital gains tax in comparison to mutual funds.
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