While most mutual funds are actively managed, there are some that passively track specific indexes. On the other hand, most ETFs passively track specific indexes. Very few are actively managed.
The biggest difference between the ETFS and mutual funds is how shares are traded.
Mutual fund shares are bought and sold once a day, after the market closes. ETFs can be traded throughout the day, so investors who want flexibility in timing purchases and sales are better off with this type of product.
Actively managed mutual funds and actively managed ETFs have higher fees than their passively managed counterparts.
Morningstar notes that the average for actively managed mutual funds is 1.09 percent, the average for actively managed ETFs is 0.76 percent, the average for passively managed mutual funds is 0.79 percent, and the average for passively managed ETFs is 0.57 percent.
If you have determined that ETFs are right for you, the big question is which one to choose. There is a long list of options from a wide variety of reputable financial service providers, and even market experts struggle with this decision.
Vanguard has a variety of products to suit every level of experience and to meet all sorts of financial goals. Two of Vanguards most popular ETFs include the Vanguard Total Stock Market ETF (VTI) and the S&P 500 ETF (VOO). Here’s what you need to know before you invest.
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VTI tracks the entire stock market, while VOO focuses on the major players that make up the S&P 500.
This is Standard & Poor’s market-cap index of the 500 largest US companies that are publicly traded. Taken as a group, this covers approximately 80 percent of the market.
The primary difference between the two ETFs here is the level of diversification in each fund.
VTI offers exposure to all of the companies in the S&P 500, as well as a variety of other large cap, mid cap, and small cap stocks, while VOO is limited to large cap.
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While VTI holds shares in a total of 3615 different companies, VOO has just 510.
Expense rates are the same for both at 0.03 percent.
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Though past performance doesn’t predict future performance, a look at each fund’s returns compared to each other and to the benchmark offers a glimpse into how performance differs.
Overall, the total stock market approach has historically been more successful.
While the S&P 500, and therefore VOO, ensures representation across industry sectors, the way each sector is weighted is not identical to the total market. Here is a comparison:
If you are interested in a certain level of exposure to specific industries, it may impact which fund you choose for your portfolio.
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The top 10 stocks held in each fund can offer a better perspective on the similarities and differences between ETFs.
As you can see, the top ten holdings are nearly identical between the two funds.
VTI and VOO both incur risk simply because any investment in the stock market carries risk. Vanguard publishes the following analysis:
“Stock markets tend to move in cycles, with periods of rising stock prices and periods of falling stock prices.
The fund’s target index may, at times, become focused in stocks of a particular sector, category, or group of companies.
Because the fund seeks to track its target index, the fund may underperform the overall stock market.”
VOO may also have some additional risk due to the strategy of focusing on large-cap stocks. Vanguard says this about the investment style risk:
“Large-cap stocks tend to go through cycles of doing better–or worse–than other segments of the stock market or the stock market in general.
These periods have, in the past, lasted for as long as several years.”
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