The difference between VOO and VTI is unimportant.
There are many frequently-debated questions. Questions like whether VOO and VTI are adequately “diversified,” whether it is even possible to be more diversified than VTI, are endlessly and mostly fruitlessly debated. I just want to focus on VOO versus VTI.
VOO = the S&P 500 stocks, mostly large-caps
VTI = the whole stock market, S&P 500 plus the other 3,000 or so, mid-caps and small-caps
Some reasons why I think the difference is unimportant are:
- 80% of the market cap–that is, the dollar value of the stock market is in the S&P 500 stocks. What happens in the other 20% can’t matter all that much.
- Despite VOO being mostly large-caps and the rest being mid-caps and small-caps, the correlation between the stocks IN the S&P 500 and the stocks that are NOT in the S&P 500 has been 0.889, i.e. 88.9%. That is, their pattern of ups and downs 88.9% similar.
- In other words, the additional stocks in VTI don’t amount to much in dollars, and are only a little different in behavior.
So, how much difference is there between VOO and VTI? In order to get a longer look back, I’m going to use their mutual fund equivalents, VFINX (=VOO) and VTSMX (=VTI).
First, 2000-2003, the big tech crash that cut the value of both funds roughly in half. Please, I want you to see my point, “not much difference,” and not focus entirely on which of the two might have been slightly better.
“Max drawdown” is the depth of the plunge. -47.51% for S&P 500, -48.51% for total stock. Not much difference. No ordinary human being could feel much better about -47.51% than -48.51%. And the “more diversified” fund actually plunged deeper.
Now, the Big One, the global financial crisis of 2008-2009.
The plunge was -51.83% for S&P 500, -51.87% for Total Stock. During the plunge the two lines are almost exactly over each other. Yes, Total Stock recovered a little more robustly, but even so, four years later neither of them had recovered fully.
As it happens, in both of these, you could argue that Total Stock was a tiny bit better. Now let’s look at their whole history since inception of Total Stock:
This time, overall, the S&P 500 did a tiny bit better. But we’re still talking about an average annual return of 10.68% versus 10.54%. IT DOESN’T MATTER.
A lot of nonsense gets written about supposed deficiencies of the S&P 500 index, mostly a talking point against indexing itself. But the S&P 500 index was always intended to be a total market index, limited by the computing power available in 1957, the desire to calculate it hourly, and the speed of stock ticker wire transmission. It always was and still is a pretty close approximation to the total market.
Should you switch? Having said all that, I personally switched from Vanguard 500 Index to Total Stock back around 2003 or so. But not because I thought it would be “better,” exactly, more out of a simple sense of tidiness. When I first invested in the Vanguard 500 Index fund, my rationale was “I don’t want to pick stocks at all, I want to hold the whole market,” and the 500 Index Fund essentially did that. But Total Stock was just a slightly cleaner, tidier realization of the same idea, and the expense ratio was the same, so I switched.
Switch if you like, just don’t kid yourself that it makes much difference one way or the other.
