Differences between VOO and VTSMX

[Nevs]

Hi all,

I have a few questions regarding VOO and VTSMX, and I'd like someone to tear apart my ideas about these two funds so I can better understand them. I've attached an image to clarify the funds and their respective graphs.

My understanding is that VTSMX tracks the entire market as a whole within the US, and VOO tracks the top companies in the US. It appears that VOO is a good benchmark to track the entire market, as the graphs are almost identical, yet VOO outperforms because the top companies carry most of the weight in the economy and you also get the advantage of higher dividends from most of the established enterprises. You also get the benefit of international investments, because almost all of the largest companies are heavily involved in international markets in some form or another. Another benefit to VOO is the lower expense ratio. While VTSMX is sitting at 0.17%, VOO is sitting at 0.05% and even VOOG, the growth S&P ETF is sitting at 0.15%. Both of these seem to outperform with the same trending graph as VTSMX, but also are coupled with a lower expense ratio.

So my question, why don't I hear people talking about VOO and VOOG rather than VTSMX? Currently, my IRA is fully invested in VOO (I'm just starting out), but want to understand the buzz around these other Vanguard funds and why someone would choose something like VTSMX or VOO or VOOG. Is there a benefit I'm not seeing?

Thanks!

[themagicman]

Hi all,

I have a few questions regarding VOO and VTSMX, and I'd like someone to tear apart my ideas about these two funds so I can better understand them. I've attached an image to clarify the funds and their respective graphs.

My understanding is that VTSMX tracks the entire market as a whole within the US, and VOO tracks the top companies in the US. It appears that VOO is a good benchmark to track the entire market, as the graphs are almost identical, yet VOO outperforms because the top companies carry most of the weight in the economy and you also get the advantage of higher dividends from most of the established enterprises. You also get the benefit of international investments, because almost all of the largest companies are heavily involved in international markets in some form or another. Another benefit to VOO is the lower expense ratio. While VTSMX is sitting at 0.17%, VOO is sitting at 0.05% and even VOOG, the growth S&P ETF is sitting at 0.15%. Both of these seem to outperform with the same trending graph as VTSMX, but also are coupled with a lower expense ratio.

So my question, why don't I hear people talking about VOO and VOOG rather than VTSMX? Currently, my IRA is fully invested in VOO (I'm just starting out), but want to understand the buzz around these other Vanguard funds and why someone would choose something like VTSMX or VOO or VOOG. Is there a benefit I'm not seeing?

Thanks!

You are correct that VOO is largest companies in the US (500 of these). VTSMX tracks the entire market .

To compare the expense ratio is not a fair comparion because VOO is an ETF and VTSMX is an investor level fund. The ETF version of VTSMX is VTI which has the same expense ratio as VOO, so there is not an advantage to either of these.

The reason most people here recommend VTI of VOO is because VTI includes the small and mid cap companies in the US market. VTI is around 75% VOO (which is why they track similar) . While these large companies make up a large portion of the total market there is still the small and mid cap companies. Generally these companies are more volatile and over the long run typically out preform the larger companies as the growth potential is much higher.

[Proud Foot]

Like themagicman pointed out, VTSMX is a investor level fund.  You should redo your chart to remove VTSMX and replace it with VTI as it has the same ER as VOO and VOOG so neither fund will have an advantage in that area.  I would also adjust the start date so they are all the same to really compare them. In your chart the VTSMX value at the same date as the start of VOO  and VOOG is not the same and does not give an accurate comparison. Your actual returns will not change but the chart will provide a better visual comparison. 

[Nevs]

Like themagicman pointed out, VTSMX is a investor level fund.  You should redo your chart to remove VTSMX and replace it with VTI as it has the same ER as VOO and VOOG so neither fund will have an advantage in that area.  I would also adjust the start date so they are all the same to really compare them. In your chart the VTSMX value at the same date as the start of VOO  and VOOG is not the same and does not give an accurate comparison. Your actual returns will not change but the chart will provide a better visual comparison.

Thanks for the reponses! It doesn't appear to give me the option to adjust this graph beyond what is displayed here, it should be showing the full 10 years. Was this particular ETF created in Vanguard recently? Is it a bug?

Maybe my lack of understanding comes from the difference between an ETF and an "investor level fund". If the ETF has a lower expense ratio, why bother with the other fund? What is the difference? I thought I understood, but perhaps I do not.

[themagicman]

Maybe my lack of understanding comes from the difference between an ETF and an "investor level fund". If the ETF has a lower expense ratio, why bother with the other fund? What is the difference? I thought I understood, but perhaps I do not.

Investor level funds have a smaller minimum. Admiral level funds come into play usually at $10k in the fund. Typically the expense ratio for ETF and admiral have the same expense ratios. There are advantages to each of these but they are pretty similar. They hold the same holdings (Same companies). Index funds allow the purchase of fractional shares and allow for automated investing.

[forummm]

http://forum.mrmoneymustache.com/ask-a-mustachian/etf-vs-index-fund-why-choose-one-over-the-other/
http://forum.mrmoneymustache.com/investor-alley/etfs-v-mutual-funds/
http://forum.mrmoneymustache.com/investor-alley/vanguard-mutual-funds-vs-etfs/
http://forum.mrmoneymustache.com/investor-alley/vanguard-etf-or-vanguard-index-fund/
http://forum.mrmoneymustache.com/investor-alley/etf's-vs-mutual-funds/