The Dow Jones Industrial Average, or the NASDAQ? The two are often pitted against each other as to which one is better. This article analyzes their different strengths and weaknesses in order to determine which Total Stock Market Fund would be a better option for you.

The “best total stock market index fund” is a question that many investors ask. The answer to this question comes down to personal preference.

Which is the Better Total Stock Market Fund?

Vanguard Total Stock Market ETF (VTI) is one of the most popular exchange-traded funds in the world. Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is one of the most popular mutual funds in the world. These low-cost index funds include:

  • Vanguard owns and manages the company.
  • Is a tax-efficient investment
  • In comparison to their contemporaries, they have an extraordinarily low expenditure ratio.
  • Is it a better investment than active funds with comparable investment goals?

As a consequence, both of these funds are excellent long-term investment possibilities. They are particularly intriguing to investors who are looking for low-cost, long-term investments.

Both funds will be thoroughly examined in this paper. We will go through both funds in detail:

  • Investing priority
  • Investment holdings & size
  • Performance
  • Turnover & tax impact in an investment portfolio

We’ll also guide you in the right direction for where an ordinary investor may buy these funds, as well as what to look out for while setting up your investing accounts.

Before we go any further, it’s worth noting that VTI and VTSAX both follow the same index, the CRSP US Total Market Index. The CRSP US Total Market Index tracks the entire stock market in the United States. However, there are subtle distinctions between these whole stock market funds.

VTI is an index fund, whereas VTSAX is a mutual fund, which accounts for the minor discrepancies. Their respective fees reflect this differentiation as well. Let’s look at the differences between an ETF and a mutual fund before discussing VTI versus VTSAX.

The distinctions between an ETF and a mutual fund

Individual investors may invest in ETFs and mutual funds, which aggregate a number of different assets.

Stocks, fixed income instruments, commodities, and other assets that an individual investor could not have access to on their own are examples of these investments. Individual equities are the only component of VTI and VTSAX’s pooled investments.

Since the investments in each fund are virtually identical, let’s look at some of the key The distinctions between an ETF and a mutual fund.

Liquidity

The main difference between mutual funds and ETFs is liquidity.

A mutual fund manager is in charge of managing mutual funds. Investors buy mutual fund shares from the mutual fund company.

The net asset value of these shares is calculated (NAV). The NAV of a mutual fund is determined by the total value of the underlying stocks. After the stock market has closed for the day, this number is determined.

When an investor sells or redeems a mutual fund, the mutual fund management buys back the investor’s shares. The transaction, however, does not close until the exchanges shut for the day. The NAV is recalculated after market hours, and mutual fund shares are redeemed at the new NAV value.

ETFs, like individual stocks, are exchanged on a stock market. ETFs may be bought and sold at any time since they are traded on a stock market. The deal is completed instantly since the opposing party is another investor (not the mutual fund firm).

During regular times, this may not be a significant concern. During market upheaval, however, it is quite important. Especially when the markets are closed due to major stock market fluctuations.

Throughout the early weeks of the COVID-19 epidemic, for example, the whole stock market shuttered multiple times during the trading day. ETF investors who wanted to sell shares fared better than mutual fund holders who had to wait until the end of the trading day to make their transactions.

Tax effectiveness

Index funds, whether ETFs or mutual funds, may help you save money on taxes. However, ETFs offer a minor advantage over mutual funds.

The mutual fund management must have enough cash to redeem shares when shareholders redeem mutual funds. When the stock market is experiencing a run (as it was during the early days of COVID), the fund manager may need to sell extra equities to create cash. Additionally, such sales may result in additional capital gains, which are distributed to the surviving owners.

When ETF investors sell their shares, the shares are bought by another ETF investor. That implies no assets are being sold by a fund management in order to purchase ETF shares.

Trade execution differences

There are a few distinctions between ETF trading and mutual fund trades. This difference between VTI and VTSAX may influence an investor’s decision between the two funds. Here are three ways ETFs vary from mutual funds in terms of trading.

The purchase minimums for ETFs vary.

An ETF’s minimum purchase is one share. Most ETFs may be exchanged with any financial institution with minimum or no transaction costs since they trade like stocks. So, for the same price per share, an investor may purchase one share or 5000 shares of the same ETF.

In most cases, mutual funds have a dollar minimum initial investment. The minimum investment for new investors in VTSAX at Vanguard, for example, is $3,000. You may purchase VTSAX shares for less than $3,000 at Schwab, but you’ll have to pay a $49 transaction charge each time. This renders that alternative too expensive.

Purchasing fractional shares of a mutual fund is more convenient.

You may acquire fractional shares of a mutual fund on most trading platforms. When most investors decide to invest a set dollar amount on a regular basis throughout time, they do this. Dollar-cost averaging is the term for this.

Those identical trading platforms, in general, require you to purchase whole ETF shares. M1 Finance looks to be the only exception, since it permits investors to invest in fractional shares. However, most trading systems do not allow you to do this with ETFs.

Mutual funds, on the other hand, are offered in more locations than ETFs.

ETFs aren’t frequently included in corporate retirement plans.

ETFs are unlikely to appear in a 401k or 403b plan since they need full shares to be exchanged.

However, mutual funds will be present. Different versions of the same mutual fund are often seen. This is due to the fact that they often exist in distinct share classes.

Share classes exist in mutual funds.

ETFs don’t have a share class because they don’t have one. A single share costs the same as 50,000 shares.

A higher investment in a mutual fund, on the other hand, represents less risk for the fund management. As a result, mutual funds often provide a discount (in the form of reduced cost ratios) for greater investments.

The California Long-Term Tax-Exempt Fund, for example, has two share classes: Investor and Admiral. Investor shares are available for a minimum investment of $3,000, however the fee ratio is 0.17 percent. Admiral shares offer a reduced cost ratio of 0.09 percent, but you must invest a minimum of $50,000 to begin.

Even though they are offered as Admiral shares, VTSAX requires a $3,000 minimum investment.

Aside from share class distinctions, mutual funds may charge fees that are not often charged by ETFs.

Transaction fees may apply to mutual funds.

Because ETFs are exchanged like stocks, they don’t have transaction costs.

This is contingent on who is issuing the mutual fund and how you are purchasing it. There are no transaction expenses when you purchase a Vanguard mutual fund if you have a Vanguard account. If you purchase the identical Vanguard fund in your Schwab trading account, though, you’ll almost certainly pay transaction costs.

This is only for no-load money. No-load funds, such as Vanguard, are mutual funds that do not charge a commission. However, many funds levy charges or fees if you:

  • Purchase the fund’s shares.
  • Sell the fund’s shares.
  • Or both

However, mutual funds have an edge over ETFs when it comes to dollar cost averaging.

Let’s take a look at the Investing priority of these funds.

Investing priority

The investing aim of both VTI and VTSAX is to track (not outperform) the CRSP, which follows the whole US stock market. Because they are both index funds, they buy the same amount of every publicly listed company in the United States while ignoring overseas equities.

What is the CRSP Total Market Index for the United States?

The Center for Research in Security Prices (CRSP) produced the US Total Market Index. The Center is a world leader in high-quality historical market data and returns for study.

The CRSP’s depiction of the whole US stock market, including mega-cap and large-cap firms, as well as mid-cap and small-cap enterprises, is the US Total Market Index.

The CRSP US Total Market Index includes 4,092 businesses as of the quarter ended March 31, 2022. This equated to a market capitalisation of $45.3 trillion dollars.

Both VTSAX and VTI owned individual equities in about 4,124 publicly listed U.S. firms as of March 31, 2022.

Investment holdings

The Investment holdings are virtually the same for VTI and VTSAX. Let’s take a closer look at what the Top Ten Assets look like:

Top Ten Assets

The Top Ten Assets represent almost 25% of the entire portfolio for both Vanguard funds. As outlined in the picture below, the top holdings are mostly from the technology sector.

However, Warren Buffett’s Berkshire Hathaway is in the top ten, as well as two health sector companies, United Health Group and Johnson & Johnson.

Tech companies dominate both VTI's and VTSAX's top ten list: Apple Microsoft Alphabet (Formerly Google) Amazon Tesla NVIDIA Berkshire Hathaway Meta Platforms (formerly Facebook) United Health Group Johnson & JohnsonThe top ten holdings in VTI and VTSAX account for around a quarter of total assets.

Because the top ten firms in both Vanguard funds account for around 25% of their total assets, the remaining 75% is divided among 4,100 additional companies.

Let’s take a look at each funds’ total holdings by sector. To make it simpler to understand, the holdings are depicted as a pie chart.

Total Holdings

The FTSE Industry Classification Benchmark Sector Allocation chart shows a breakdown of the CRSP Total US Stock Market Index. Technology, Industrials, Consumer Discretionary, Health Care, and Financials make up the top 5 sectors represented in the index.Companies in the CRSP Total US Market Index, broken down by sector

As you can see, technology businesses account for little over a quarter of the CRSP, with consumer discretionary goods (15.27 percent), health care (12.86 percent), and industrials following closely behind (12.65 percent ).

Because the CRSP is closely followed by both VTSAX and VTI, their holdings are fairly comparable.

Value vs. growth stocks

Both of these products are passive index funds that track the whole stock market in the United States. As a consequence, neither fund attempts to have a growth or value bias.

However, since the CRSP Total US Stock Market is a market capitalization index, these funds may favor large-cap growth equities over value stocks.

Let’s take a look at the overall assets managed (AUM).

Under management assets

Vanguard index funds are among the world’s most popular index funds. New investors are attracted to mutual funds and exchange-traded funds because of their cheap costs.

VTI and VTSAX are two of Vanguard’s biggest funds, since they follow one of the most popular stock indexes. The total AUM of VTSAX and VTI is over $1.3 trillion.

VTI manages around $287.3 billion, according to ETF Database, which keeps track of the top 100 ETFs by assets managed. VTI is now the world’s third biggest ETF, after only SPY and IVV.

As a result, VTSAX accounts for the remaining $1 trillion in total net assets, making it the biggest mutual fund in the world.

Let’s look at performance both in comparison to the CRSP benchmark and in absolute terms.

Return on investment

Before we dive in, both VTI and VTSAX are total market funds. But the major difference in these returns is based on two factors: management fees & taxes.

Ratios of expenses

Also known as management fees, Ratios of expenses are taken from the investment (in both cases, Vanguard) to cover the costs of operating the fund. Usually, Ratios of expenses are reflected by an adjustment to the end of day share price.

An index fund has the benefit of not having to pay for active fund managers, investment analysts, or other employees to handle the investments. Many investors choose index funds because of their inexpensive costs.

VTI has a 0.03 percent expenditure ratio, while VTSAX has a 0.04 percent expense ratio. Vanguard takes $3 per year for VTI and $4 for VTSAX for every $10,000 invested.

In contrast, most financial advisers consider a fund to be reasonably priced if its cost ratio is less than 1% per year.

Because of the low turnover rate inside the funds, Vanguard can afford to keep these charges low. However, there is some turnover, which has tax implications.

Tax drag

Mutual funds and exchange-traded funds (ETFs) do engage in taxable events. Harvesting capital gains or getting dividends from the underlying firms are examples of taxable events.

Because Vanguard does not pay taxes on these occurrences, it’s difficult to see how taxes affect yearly returns. It’s the investor’s responsibility.

Dividends

Dividends are often overlooked in most investing accounts. However, you’ll most likely see dividend transactions for each of your mutual funds or ETFs in your investment portfolio on a quarterly basis.

If your fund has a small number of dividend-paying companies, you should expect a modest distribution. In a taxable account, however, dividends are taxed. This might be qualified dividends (which are taxed at capital gains rates), ordinary dividends (which are taxed at regular income tax rates), or a mix of both.

Distributions of capital gains

And at the end of the year, near the end of December, you’ll see Distributions of capital gains in each of your funds. The amount of distributions depends on the amount of activity in your fund.

If your fund has high turnover, you’ll likely be subject to a lot of Distributions of capital gains. High turnover means an active fund manager is consistently buying and selling underlying securities within the fund. Those capital gains are required to be passed on to the fundholder (that is you).

Index funds, on the other hand, see very little turnover. Each of these indicators is recalculated every year. The funds are also rebalanced on a quarterly basis. As a result, there isn’t much buying and selling going on. As a result, your performance will be less affected.

However, as indicated earlier, VTSAX may engage in more buying and selling than VTI. This is due to the need to retain a sufficient amount of cash on hand for redemptions, rather than active fund management.

Let’s compare the performance of VTI and VTSAX against the CRSP Index.

CRSP Index vs. VTSAX Index

Here is the breakdown of VTI’s annual Return on investment over the past year, 3 years, 5 years, past decade, and over its history:

  • 11.67 percent after one year
  • 18.14 percent over three years
  • 15.36 percent after five years
  • 14.24 percent after ten years
  • 8.63 percent since inception

Based on its cost ratio drag, VTI’s performance lags somewhat behind its target index.

Since its inception in 2001, VTI’s average annual Return on investment is 8.63%. You’ll notice ‘spliced total stock market index.’ This simply reflects the fact that VTI tracked three different stock market indices since inception:

  • Until 2005, the Dow Jones U.S. Total Stock Market Index (previously the Wilshire 5000)
  • US Broad Market Index (MSCI) (from 2005 until 2013)
  • US Total Market Index CRSP (since 2013)

All three indexes represent the complete stock market in the United States.

Vanguard's Total Stock Market ETF (VTI) tracks the CRSP Total US Stock Market Index, representing similar Performance over the past year, 3 years, 5 years, 10 years, and since inception (2001).VTI’s and the US Stock Market’s annual performance (Vanguard website)

Although they have similar returns, VTSAX slightly trails both the CRSP and VTI. This is primarily because of the expense ratio difference. However, you can see that there is a difference in the after-tax Return on investment, as well.

The’since inception’ investment statistic is the other major distinction in their prior performance. This is because VTSAX was founded in 2000 by John Bogle (former chairman and founder of Vanguard), whereas VTI was introduced in 2001.

VTSAX's Return on investment is almost identical to that of the CRSP and VTI. The main difference lies in slightly higher Ratios of expenses and the tax benefits of ETFs over mutual funds.VTSAX’s Return on investment over the past 1, 3, 5, 10 years, and since inception

Conclusion

Finally, both VTI and VTSAX provide low-cost alternatives to invest throughout the whole market. And this is an excellent approach to invest for long-term growth and financial security. The only difference between the two is whether you select a mutual fund or an exchange-traded fund.

VTI and VTSAX may be purchased via practically any online brokerage business or your financial adviser. They are, however, absolutely free of charge at Vanguard (subject to account minimums).

The “best total stock market etf 2022” is a question that has been asked before. The answer to this question is not one specific fund, but rather the best overall funds for investing in the stock market.

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