Battle Of The Vanguard Titans

I started investing in mutual funds in 1997 as mentioned in my journey post.  At the time, there were way fewer funds out there and I didn’t have enough initial deposit to open many of them.  Fidelity’s Magellan Fund was a juggernaut, the largest in the world and everyone wanted in it.  I didn’t have enough to meet the initial deposit requirement.

But I did have enough for the Vanguard S&P 500 Index Fund (VFIAX) and it was the second or third largest fund and growing fast.  It was also the first ever mutual fund for individual investors, started way back in 1976!  It had some fame.  I dug this history piece up from 1999 when the S&P Index Fund was closing in on Magellan.

I was still an investing noob at the time but learning fast by reading everything I could get my hands on.  But as a noob, you tend to gravitate towards what others are doing.  And if I couldn’t get in the Magellan fund, then VFIAX seemed the next best “go with the popular folks” option.

It wasn’t just because it was popular, it was also performing well and I realized that as an index fund the fees were way lower.  So that’s the horse I jumped on.  And I’m still there today.

Seriously AF?  You’re not in The Vanguard Total Stock Market Index Fund (VTSAX)!?  You claim that Jim Collin’s book is the bible of simple investing and you’re not even invested in the very fund that he recommends?

Doh…

Well, VTSAX did exist at the time, it was started in 1992.  But VFIAX (S&P 500) was older and more established and the one that was written about, talked about, and mentioned in virtually every investing publication.  I was getting Money magazine and Investors Business Daily at the time and it was clear that VFIAX was the workhorse for my financial future.

By the time index fund investing came to the forefront in the 2000’s and Warren Buffet was even recommending it, I realized that it might have been better to be in VTSAX.

What are the differences between the two you ask?

 

Apples To Apples?

VTSAX is the whole market, every stock.  While VFIAX is based on the Standard & Poor’s 500 large companies with market capitalizations of at least $6.1 billion.  So it weighs heavily towards large-cap companies and doesn’t have any exposure to small and mid-caps.

But my shares of VFIAX were in a taxable account, and substantial by this time.  Moving them over to VTSAX would force me to pay taxes on a butt-load of capital gains.  So I did some research and decided to leave them and just keep adding to the investment, which I’m still doing today.

Why did I leave them?

Turns out the two funds have pretty similar performance over time, with one or the other sometimes outperforming for a few years here and there.  Let’s break down the numbers with some info from Vanguard.

 

As you can see the numbers are pretty close.  The expense ratio is the same (very low) and although VFIAX has performed slightly better over the past 5 years, VTSAX has done better since inception.

Vanguard puts them in the same “Risk Potential” category, but they are different.  Since VTSAX is the entire stock market, it includes mid, small, and even micro-cap stocks which makes it more diversified but also introduces more risk and volatility.  But the difference is not enough to bump it into the next category based on Vanguard’s scoring criteria.  Their category #4 is labeled “Moderate to Aggressive Funds” and is the 4th riskiest out of 5 categories.

 

Exposure

As I learned more and became more obsessed with diversification, I thought it’d be wise to get some of the exposure to mid and small caps that VTSAX has, but VFIAX does not.  So I bought both the Vanguard Small and Mid Cap Index funds as well around 8 years ago.

Now all I do to mimic VTSAX is keep the same percentages of my money in the small and mid cap funds as VTSAX has, and let my VFIAX represent the large caps.  So what’s the breakdown on market cap percentages for VTSAX?  This is from Morningstar:

 

For a simple 3-tiered categorization process, I combine “giant” and “large” to mean large-cap because ya know, synonyms.  So that’s about 71.5%.

Mid-Caps are 19.17%.  And “small” and “micro” combine to represent small cap at around 9%.

At the end of every year, I check the balance of my three funds – the S&P 500 fund (large cap), the Mid Cap Index, and the Small Cap Index.  If the balances are off, I make my next contributions accordingly to get them as close as possible to the above numbers that VTSAX has.

That’s my simple way of mimicking VTSAX without actually having VTSAX.  Remember I said a while back that I’m a lazy investor.

The only small problem with this approach is that both the Small Cap and Mid Cap Index Funds have a slightly higher expense ratio of .06% instead of the rock-bottom .04% of VTSAX.  I’m not too bothered by this as it’s a small difference and both fees are so low as compared to the industry it’s still a bargain.

As you can see, the performance of VTSAX and VFIAX have been very close for a long time, so I’m not even sure if my strategy of mimicking VTSAX by using the small and mid cap funds is necessary.

But who knows, there may well come a time in the future when small or mid caps go on a huge tear as compared to the market in general, and if that’s the case VTSAX will start outperforming VFIAX.  My strategy will assure that I get the benefits and gains of that situation if it happens.

Your turn – Anyone else out there have VFIAX instead of VTSAX?

* For the sake of history and accuracy, there can be some confusion about the ticker symbols and when the funds started.  Here’s the facts.  The S&P 500 Index Fund started in 1976 as ticker symbol VFINX.  The Total Stock Market Index Fund started in 1992 as ticker symbol VTSMX.

Then in the year 2000, Vanguard launched “Admiral Share” versions of both.  Admiral Shares have lower fees that result from larger accounts, but they also have much larger initial deposit requirements.  The Admiral share versions and their associated ticker symbols are what most folks commonly refer to today.  They are VFIAX for the S&P 500 Index Fund, and VTSAX for the Total Stock Market Fund.