Author Topic: VTSAX vs VTI  (Read 1239 times)

Niceday

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VTSAX vs VTI
« on: January 18, 2020, 01:22:02 PM »
I recently found this forum and has been reading quite a bit and learning a lot.  I noticed that there is a strong following of VTSAX.  The ETF VTI seems to be an equivalent.  Since mutual funds can have distributions which are taxable events in taxable accounts, wouldn't VTI be the preferred investment vehicle between the two?

specialkayme

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Re: VTSAX vs VTI
« Reply #1 on: January 18, 2020, 03:24:36 PM »
VTI issues dividends which are also distributions and taxable events in taxable accounts. Both VTI and VTSAX have almost identical distributions. Have you accounted for this in your analysis?

terran

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Re: VTSAX vs VTI
« Reply #2 on: January 18, 2020, 08:53:29 PM »
You're right that mutual funds usually issue taxable capital gains distributions that ETFs don't (as @specialkayme says, ETFs still distribute dividends), but Vanguard has a patent that lets them treat their mutual funds as share classes of their ETFs wit the end result that they can flush capital gains out of their mutual funds in the same way that they and most other companies flush them out of ETFs without distributing them to current owners.

Either VTSAX or VTI is a perfectly fine option. VTSAX will allow for easier buying/selling since you can just put in the order and it will execute at the end of the day without having to worry about price variation, limit orders, etc. You can also buy partial shares which results in less "spare" money being left behind. And you can set up automated investing instead of having to go in and set up the purchase. You can also always convert VTSAX to VTI without selling (so it won't be taxable) by calling Vanguard, but you can't do the reverse.

The biggest (only?) advantage of holding a Vanguard ETF instead of the equivalent mutual fund is that it's more transferrable because more companies allow commission free trades of Vanguard ETFs than Vanguard mutual funds. It's possible the ETF expense ratio is slightly lower, which is  a good thing, but the bid/ask spread of the ETF might make up for that.

Long and short: If I held investments at Vanguard or a company that allowed commission free trading of Vanguard mutual funds (like Etrade, I think?) I would probably hold VTSAX, but it's not a strong preference and I would have no problem holding VTI.

Niceday

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Re: VTSAX vs VTI
« Reply #3 on: January 18, 2020, 10:24:48 PM »
Yes, I was referring to the distributions due to the portfolio turnovers in the mutual fund.  Your answer is awesome, terran!

MustacheAndaHalf

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Re: VTSAX vs VTI
« Reply #4 on: January 19, 2020, 04:31:48 AM »
I agree either ETF or mutual fund is a fine option - it's better to pick one than wait.  VTI and VTSAX beat 100% cash.

I favor ETFs, especially ones like VTI.  I disagree it's complicated: you select "buy Vanguard ETFs", enter VTI, and select "market order".  VTI and very high volume ETFs show a price gap of 1 penny, and then price improvement eliminates even that amount (VTI is $168.76/share now).

You will have cash left over at Vanguard.  As your account grows, that fractional share becomes less and less significant - especially if you have BND ($84.35/sh) or VXUS ($56.64/sh) available for purchase, and you figure out a combination.  Note Betterment already offers "fractional ETF shares", and at some point, others may have to follow suit.

The big advantage, in my view, is from rebalancing and tax loss harvesting.  If you tax loss harvest from VTI to an S&P 500 ETF, like VOO, you can sell VTI, then seconds later buy VOO.  You use a "credit" from the same of VTI to immediately buy an equal value of VOO.

The market tends to go up, so let me illustrate a problem with mutual funds by exaggerating with a +1%/day increase in stock prices.  If you sell VTSAX on day 1, you wait until the market close, and you profit +1%.  Great news... but now you're in cash.  On day 2, you issue a buy order for VTIAX (Vanguard S&P 500).  The market goes up another +1% while you sit in cash, and you pay 1% more for VTIAX.  So if the market goes up +2% in 2 days, you only capture +1% of it, because you were out of the market for all of day 2.  With ETFs, you are out of the market for seconds - you get the whole +2% gain over 2 days (in this exaggerated example, showing the potential downside).  Most of the time, that won't happen - but sometimes it will.  After all, the market tends to go up, so being out of the market tends to be a losing proposition.

Now to hurt my own preference, mutual funds also allow "auto investment", meaning you can automatically buy every week, or month or quarter.  You can direct some of your paycheck to Vanguard, and have Vanguard automatically invest that amount.  Very nice feature, and not available with ETFs.

One more advantage of ETFs: most brokerages now charge $0/trade, even for the ETFs of other brands.  You can buy iShares or Schwab ETFs at Vanguard.  Schwab lets you buy VTI for $0.

Keeping in mind that the market tends to move up, I'd say pick the approach you like, and start investing.  Delaying means you're 100% in cash, which is a poor investment compared to either VTI or VTSAX.

terran

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Re: VTSAX vs VTI
« Reply #5 on: January 19, 2020, 08:04:12 AM »
...
The big advantage, in my view, is from rebalancing and tax loss harvesting.  If you tax loss harvest from VTI to an S&P 500 ETF, like VOO, you can sell VTI, then seconds later buy VOO.  You use a "credit" from the same of VTI to immediately buy an equal value of VOO.

The market tends to go up, so let me illustrate a problem with mutual funds by exaggerating with a +1%/day increase in stock prices.  If you sell VTSAX on day 1, you wait until the market close, and you profit +1%.  Great news... but now you're in cash.  On day 2, you issue a buy order for VTIAX (Vanguard S&P 500).  The market goes up another +1% while you sit in cash, and you pay 1% more for VTIAX.  So if the market goes up +2% in 2 days, you only capture +1% of it, because you were out of the market for all of day 2.  With ETFs, you are out of the market for seconds - you get the whole +2% gain over 2 days (in this exaggerated example, showing the potential downside).  Most of the time, that won't happen - but sometimes it will.  After all, the market tends to go up, so being out of the market tends to be a losing proposition.

...

You can exchange mutual funds at Vanguard. I'm pretty sure both the sale and purchase execute at market close on the same day: https://investor.vanguard.com/contact-us/faqs/exchange-vanguard-fund