Author Topic: VITSX vs VFIAX  (Read 3561 times)

jeromedawg

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VITSX vs VFIAX
« on: October 11, 2017, 03:39:02 PM »
Hey guys,

My company now offers the option to invest in these two funds via my 401k - I'm currently invested in a 'generic' index fund so I'll probably switch over to one of these as the expense ratios are lower anyway. That said, should I go with the institutional total market fund? Or stick with the S&P500 admiral class? I thought these were different primarily because of the minimum investment amount. Expense ratios are the same though... any thoughts? I'm leaning towards just doing straight VITSX

VoteCthulu

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Re: VITSX vs VFIAX
« Reply #1 on: October 11, 2017, 05:08:53 PM »
The primary difference is that VITSX is a total stock market fund, and VFIAX is a S&P500 fund. I would prefer the former if I only wanted to invest in 1-3 funds, and the latter if I need to rebalance across multiple accounts that didn't have a total stock market option.

Radagast

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Re: VITSX vs VFIAX
« Reply #2 on: October 12, 2017, 12:44:11 AM »
Unless you think the S&P committee are amazing stock pickers for the long run, total market is the way to go.

caffeine

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Re: VITSX vs VFIAX
« Reply #3 on: October 12, 2017, 08:16:45 AM »
Unless you think the S&P committee are amazing stock pickers for the long run, total market is the way to go.

The S&P 500 isn't in the act of stock picking. It represents the largest 500 companies by market capitalization. Warren Buffet and Jack Bogle both endorse the S&P 500 as an excellent way to invest.

Radagast

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Re: VITSX vs VFIAX
« Reply #4 on: October 12, 2017, 10:27:06 AM »
Unless you think the S&P committee are amazing stock pickers for the long run, total market is the way to go.

The S&P 500 isn't in the act of stock picking. It represents the largest 500 companies by market capitalization. Warren Buffet and Jack Bogle both endorse the S&P 500 as an excellent way to invest.
I was being tongue in cheek in my way of saying that the total market index is the best choice. Investing in an S&P500 index is certainly passive investing.

But, the S&P500 is not the 500 largest companies by market capitalization. It looks like the smallest company in the S&P500 is Chesapeake Energy Corp. which looks to be the 916th largest company in VTI, and is well down Vanguard's small cap index fund, VB. That means that the S&P committee actively excludes over 400 of the largest ~920 companies from all of their indexes because... reasons...

Put another way, Tesla is the largest US company not in the S&P500. It looks to be about the 117th largest company in VTI by market capitalization.
« Last Edit: October 12, 2017, 10:40:03 AM by Radagast »

jeromedawg

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Re: VITSX vs VFIAX
« Reply #5 on: October 12, 2017, 12:28:53 PM »
Thanks guys... I just realized that this was for my HSA not my 401k lol. Either way I put everything into the total market for the HSA. My 401k is still limited to the generic index fund offered by my company, but the expense ratio is pretty low so that's not so bad I guess...

nereo

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Re: VITSX vs VFIAX
« Reply #6 on: October 12, 2017, 01:21:51 PM »
Unless you think the S&P committee are amazing stock pickers for the long run, total market is the way to go.

The S&P 500 isn't in the act of stock picking. It represents the largest 500 companies by market capitalization. Warren Buffet and Jack Bogle both endorse the S&P 500 as an excellent way to invest.
I was being tongue in cheek in my way of saying that the total market index is the best choice. Investing in an S&P500 index is certainly passive investing.

But, the S&P500 is not the 500 largest companies by market capitalization. It looks like the smallest company in the S&P500 is Chesapeake Energy Corp. which looks to be the 916th largest company in VTI, and is well down Vanguard's small cap index fund, VB. That means that the S&P committee actively excludes over 400 of the largest ~920 companies from all of their indexes because... reasons...

Put another way, Tesla is the largest US company not in the S&P500. It looks to be about the 117th largest company in VTI by market capitalization.

I think this may spread confusion and/or you may not completely understand (could be either or both). The SP500 is a collection of the 500 largest companies (not necessarily the largest) traded on the NYSE and NASDAQ (i.e. "US exchanges").  Selection of a company to be included in the SP500 is based on eight weighted factors, the most important of which is market cap, but considerations are also made for liquidity, domicile, public float, sector classification, financial viability, length of time publicly traded and stock exchange.  Stocks are added (and an equal number removed) a few times per year for various reasons (some because companies market cap drops, others because they go private, others because htey merge and/or spin-off segments).

It's also a market-weighted index, which means that a company's share is proportional to the size of its market cap.  The first 5 companies account for 10% of the total index, and the first 50 stocks (10% of the index) make up half.  Where you start to see differences in market cap and inclusion/exclusion are companies that are below the top 100 and typically towards the bottom half, where they make up a very small portion of the total market cap.  Companies that get "excluded" (while having a high market cap) are often done so because of a combination of liquidity, float and length of time.  Its argued about a lot on financial boards because the simple act of inclusion into the SP500 can move the needle of a "bottom-half" company quite a bit because automatically lots of their stock gets bought up by those holding the SP500 and total market indexes.
Specifically regarding Chesapeake Energy Corp and Tesla, "chessy" had a much larger market cap until recently (the reason it's "in" the index) and their current slide is due to the drop in natural gas plus debt. While I can't say for sure I suspect Tesla's relative newness combined with lingering questions about its liquidity and long-term financial viability (its lost a considerable amount of money in consecutive quarters) has - to date - kept it out, not to mention its share price (and market cap) was about half what it is now just a year ago.  Tesla will probably be added to the SP500 this year if it can keep its share price high enough.

Tl;dr: its true that market cap isn't the only factor determining which companies are included int eh SP500, however the index overall is a very good representation of the largest publicly traded companies on US exchanges.

Final footnote: be aware that owning a Total Market index like VITSX may not give you as much exposure to small-cap and mid-cap companies as you might think. This index is also market-cap weighted.  What that means from a practical standpoint is that ~80% of the share price of VITSX is a reflection of those companies in the SP500.  Small-cap companies make up something like 3%.  If you want more small and mid-cap exposure, consider buying a fund which exclusively holds those companies (e.g. VSMAX) and adjusting your assett allocation that way.

desertadapted

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Re: VITSX vs VFIAX
« Reply #7 on: October 12, 2017, 02:08:34 PM »
Quote
Final footnote: be aware that owning a Total Market index like VITSX may not give you as much exposure to small-cap and mid-cap companies as you might think. This index is also market-cap weighted.  What that means from a practical standpoint is that ~80% of the share price of VITSX is a reflection of those companies in the SP500.  Small-cap companies make up something like 3%.  If you want more small and mid-cap exposure, consider buying a fund which exclusively holds those companies (e.g. VSMAX) and adjusting your assett allocation that way.

The following is a link the a Morningstar report that reflects investment percentage by market cap in the Vanguard total market index. 
http://portfolios.morningstar.com/fund/summary?t=VTSMX 

Radagast

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Re: VITSX vs VFIAX
« Reply #8 on: October 12, 2017, 07:53:03 PM »
Unless you think the S&P committee are amazing stock pickers for the long run, total market is the way to go.

The S&P 500 isn't in the act of stock picking. It represents the largest 500 companies by market capitalization. Warren Buffet and Jack Bogle both endorse the S&P 500 as an excellent way to invest.
I was being tongue in cheek in my way of saying that the total market index is the best choice. Investing in an S&P500 index is certainly passive investing.

But, the S&P500 is not the 500 largest companies by market capitalization. It looks like the smallest company in the S&P500 is Chesapeake Energy Corp. which looks to be the 916th largest company in VTI, and is well down Vanguard's small cap index fund, VB. That means that the S&P committee actively excludes over 400 of the largest ~920 companies from all of their indexes because... reasons...

Put another way, Tesla is the largest US company not in the S&P500. It looks to be about the 117th largest company in VTI by market capitalization.

I think this may spread confusion and/or you may not completely understand (could be either or both). The SP500 is a collection of the 500 largest companies (not necessarily the largest) traded on the NYSE and NASDAQ (i.e. "US exchanges").  Selection of a company to be included in the SP500 is based on eight weighted factors, the most important of which is market cap, but considerations are also made for liquidity, domicile, public float, sector classification, financial viability, length of time publicly traded and stock exchange.  Stocks are added (and an equal number removed) a few times per year for various reasons (some because companies market cap drops, others because they go private, others because htey merge and/or spin-off segments).

It's also a market-weighted index, which means that a company's share is proportional to the size of its market cap.  The first 5 companies account for 10% of the total index, and the first 50 stocks (10% of the index) make up half.  Where you start to see differences in market cap and inclusion/exclusion are companies that are below the top 100 and typically towards the bottom half, where they make up a very small portion of the total market cap.  Companies that get "excluded" (while having a high market cap) are often done so because of a combination of liquidity, float and length of time.  Its argued about a lot on financial boards because the simple act of inclusion into the SP500 can move the needle of a "bottom-half" company quite a bit because automatically lots of their stock gets bought up by those holding the SP500 and total market indexes.
Specifically regarding Chesapeake Energy Corp and Tesla, "chessy" had a much larger market cap until recently (the reason it's "in" the index) and their current slide is due to the drop in natural gas plus debt. While I can't say for sure I suspect Tesla's relative newness combined with lingering questions about its liquidity and long-term financial viability (its lost a considerable amount of money in consecutive quarters) has - to date - kept it out, not to mention its share price (and market cap) was about half what it is now just a year ago.  Tesla will probably be added to the SP500 this year if it can keep its share price high enough.

Tl;dr: its true that market cap isn't the only factor determining which companies are included int eh SP500, however the index overall is a very good representation of the largest publicly traded companies on US exchanges.

Final footnote: be aware that owning a Total Market index like VITSX may not give you as much exposure to small-cap and mid-cap companies as you might think. This index is also market-cap weighted.  What that means from a practical standpoint is that ~80% of the share price of VITSX is a reflection of those companies in the SP500.  Small-cap companies make up something like 3%.  If you want more small and mid-cap exposure, consider buying a fund which exclusively holds those companies (e.g. VSMAX) and adjusting your assett allocation that way.
Yup, it is actually not complicated. The S&P is perfectly fine, but given the choice Total Stock Market is generally better, but similar. In fact it looks like a completely capitalization weighted approach like Vanguard Large Cap has also been better. If I recall, S&P requires four consecutive profitable quarters, hence no Tesla.

nereo

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Re: VITSX vs VFIAX
« Reply #9 on: October 14, 2017, 07:20:39 AM »
Agreed it's not complicated.  My response was motivated by the common threads on financial blogs alleging how teh "SP500 is rigged!!" just because some company that's the 4xxth largest isn't in it, and some company that's fallen to 5xxth by market cap is still in.
No, it isn't rigged, people just don't understand it.

As for Total market index being "better" than the SP500 - "Meh" - hard to say definitively one way or another. Given that they are strongly correlated (~80% of the total market index IS the SP500 companies) one will closely mirror the other.  Will the Total Market do better over the next 5-10-30 years?  Impossible to say, and depends greatly on the tax environment going forward (currently a hot topic).  How ahs it compared in the past?  Again, very similarly;
Note: for a first approximation compare how "Large Cap" did against "Mid" and "Small cap"  some years it won, some years it lagged slightly.


Picking just one random start date (2005) the total index winds out, but just by a hair.  Pick other years and its been a wash or the total market has slightly under preformed.


Here's a Bogelheads thread for more debate on the matter
https://www.bogleheads.org/forum/viewtopic.php?t=157446

tl;dr: Both indexes are extremely similar, both will give you diversity, and which is "right" depends on the investor.