VTSAX, VTI, or VUG? Which is Best?
You want the answer to the infamous question…What to invest in? Well, this blog is great insight.
I have spent many years being formally educated by others and not one time did anyone answer this question. Teachers and professors set you up for a job and assume you will figure out the money aspect along the way. We could spend all day discussing who is responsible for personal finance literacy, but today isn’t that day. Today is about investing in great funds to build wealth.
As you may have noticed, all 3 funds in the title are from Vanguard, a brokerage for boring, old rich people. No sponsor from Vanguard, but I use their brokerage services because its cost-effective, simple, and has the funds I want.
Back to Basics
I have many blog entries speaking to why low-cost, passively managed index funds are the key to building wealth. Check those out here:
INSERT BLOG POSTS HERE
Some of the following comes from other blog posts I have written. I guess this is my way of giving myself permission to plagiarize myself. No sense rewriting the same content when it hasn’t changed.
ETF vs Mutal Fund
An EFT, or exchange traded fund, is an index fund that trades like a stock. ETFs can be traded in real time at any point throughout the trading day. And because they trade like stocks, there are sophisticated order types to control buying and selling.
Mutual funds are a bit more hands-off. It’s more like giving money to a fund manager to do the buying and selling on your behalf, typically at the end of the trading day. Mutual funds typically have a higher cost barrier to entry -- $1,000 to $5M depending on the fund. If automating investing is for you, mutual funds are the way to go.
For the sake of this discussion and the funds listed, there is little difference between the two.
VTSAX – Vanguard Total Stock Market Index Fund Admiral Shares
A mutual fund following the entire United States equity market. Founded in 2000, this fund was popularized by “The Simple Path to Wealth” by J.L. Collins. For many reasons explained in his book, Collins recommends leaning on this fund as the heavy lifter of your portfolio.
Heavy investments in tech companies have done this fund well over the past decade. Tech comprises approximately 34% of this fund. Much of which comprised of the magnificent seven. Followed closely by Consumer Discretionary (15%), Industrial (13%, and Financials (12%).
The Magnificent Seven:
Alphabet (GOOGL)
Amazon (AMZN)
Apple (AAPL)
Meta Platforms (META)
Microsoft (MSFT)
Nvidia (NVDA)
Tesla (TSLA)
These companies represent 1/3 of the S&P 500. That’s because the S&P 500 is weighted and these companies are quire large. Market performance is greatly influenced by just a few companies. Over the past few years, the more of these you bought and held, the better your investments performed.
VTI -- Vanguard Total Stock Market ETF
This is the ETF version of VTSAX. It holds the same companies in the same ratio. Identical except for being an ETF.
VUG – Vanguard Growth ETF
This volatile monster is amazing for the long-term. I say volatile because this fund focuses on large growth companies. These companies trade at a high valuation expected to go higher.
Basically, the companies within this ETF are expansion machines. These companies trade at an expensive valuation but have promise. If you thought 1/3 of your portfolio in tech stocks was heavy, VUG is comprised of 58% tech companies. The second largest sector is consumer discretionary (21%).
This ETF is reliant on optimized economic conditions. If money becomes expensive to borrow, not great. If consumers tighten the purse strings, not great. Enough writing, let’s see some comparisons.
The biggest difference is the concentration of VUG.
Here is more information including the always important expense ratio. All are below the standard of 0.2. Dividend yield is predictable as companies within VUG focus on growth and therefore retain earnings.
And a side-by-side of fund performance over the past decade. A decade where tech and growth stocks performed well.
This shows the difference between blended funds and growth funds.
Price-to-earnings (P/E) ratios examine stock price and earnings per share (EPS). It’s a metric to evaluate current price relative to company earnings and performance. A higher P/E ratio means a current stock price is expensive relative to earnings.
Price-to-book (P/B) ratios examine value.
P/B = Market Price per Share / Book Value per Share
Market Price per Share = Share Price
Book Value per Share = (Total Assets – Intangible Assets – Liabilities) / # Outstanding Shares
Value companies likely have a P/B less than 2. Again, VTSAX and VTI are blended funds, so there is a mix of value and growth.
VUG is forward thinking. It’s more like buying expensive companies still going up in value.
Remember
Past performance is not an indicator of future results. Especially with this mix. VUG will have way more volatility than a more diverse fund. During down years, it will be WAY DOWN. During up years, it may show 50% better performance than VTSAX/VTI.
My Take
I have a long investment horizon and regular cash flow. I like a mix of VTI and VUG. Probably 50/50 at this point. Here is my rationale…
Index investing is a proven strategy. VTSAX, VTI, and VUG are all great selections. Solid returns and low expense ratios. I prefer ETFs because they trade in real time, so I stick with VTI and VUG.
Over a career, growth funds will likely outperform a more diverse mix, so consider some VUG.
Cashflow is king. If my current VUG holdings decrease in value by 50%, I don’t need to sell. Cashflow allows me to invest during down markets. If I was dependent on portfolio withdrawals to support my cost of living, I wouldn’t carry so much VUG.
VTI and VUG both pay qualified dividends, which are taxed as long-term capital gains. I try to avoid high dividend investments to avoid taxation, but their dividends are reasonable.
It’s easy and repeatable to invest in 1 or 2 index funds.
Share your favorite investment with a friend and good luck!
