10 min. read

Maybe you are looking to diversify your investment portfolio, or perhaps you are a new investor looking to make an initial investment. We strongly believe that you should consider investing in low cost mutual funds or ETFs. Both VTSAX (Vanguard Mutual Fund) and VTI (Vanguard ETF) are Vanguard’s Total Stock Market Index funds.

Why should new investors consider these tax efficient options? According to a study by Longboard Capital Management of thousands of shares over 25 years, far more stocks will underperform than overperform. The major difference between VTI (exchange traded fund) and VTSAX (mutual fund) is the minimum initial investment.

While investing in a single stock can be incredibly risky, investing in an index fund helps to mitigate the threat of losing money.

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What is an Index Fund?

Investing in an index fund allows the investor to invest in many stocks at the same time. These funds can avoid risk by placing a higher weight on more profitable companies and a lower weight on less profitable firms. Unprofitable firms may even be removed from a list entirely to make room for growing enterprises.

This process allows index funds to outperform individual stocks over time significantly. To make the same profits from individual stocks, you need to get lucky and happen to choose the top 20% of shares that will be the most profitable.

Index funds must be purchased through a platform such as Vanguard, Charles Schwab, Fidelity or Merrill Lynch. Vanguard is the platform that offers the two funds that are the topic of discussion: VTSAX vs. VTI.

For investors, these two funds were designed to provide diversification, low costs, and potential tax efficiencies. While the two do have some small differences, ultimately, they are two different vehicles to invest in the same set of stocks. Indexing simply means your fund is going to follow some named stock index or series of stocks.

Before investing in these mutual funds and etfs be sure you have an appropriate investment strategy in place. Determine whether you’re going to invest in these funds in a retirement account or elsewhere. Have an understanding of your risk tolerance and whether or not you need to also hold a bond index.

What is VTSAX?

VTSAX stands for Vanguard Total Stock Market Index Fund Admiral Shares. This option is a mutual fund with a .04% expense ratio and a minimum investment of $3,000.

What is VTI?

VTI stands for Vanguard Total Stock Market ETF. This option is an exchange-traded fund with an expense ratio of .03% and a minimum investment of the price of one share, and can be traded like stock.

What About VTSMX?

You may have heard of VTSMX, which was another mutual fund that Vanguard used to offer, which it has since closed. Initially, this option had a higher expense ratio than VTI and VTSAX but a lower minimum investment than VTSAX. However, this soon changed when VTSAX minimum investment was reduced to $3,000.

VTSAX essentially replaced VTSMX with a lower expense ratio while allowing people to invest with the same minimum amount. While VTSMX is no longer available, many of the same benefits can now be found in VTSAX, which is likely the reason that Vanguard chose to replace it.

VTSMX closed to new investors in August 2018.

VTSAX vs. VTI: The Real Differences

Now that you have a basic understanding of what these two options are, let’s dive deeper into what makes them different.

Minimum Investments

VTSAX and VTI have different minimum investments that must be made to purchase each fund. VTSAX boasts a much higher minimum investment at $3,000 while VTI can be invested in for the price of a single stock. Stock prices fluctuate but can be as low as $150.

While there are some incentives to keeping your money in VTI, most of the time, people will invest in VTSAX if they meet the minimum requirement due to the benefit of automatic investing. People usually choose to invest directly into VTSAX, to know that all their money is being saved consistently for their goals without a lot of thought.

Real-Time Pricing

Something to keep in mind is that VTI offers real-time pricing per share, while for VTSAX, the price is only calculated at the end of the trading day. However, even though the official price of VTSAX is not available until the end of the day, investors can check on the trading price of VTI throughout the day so they know what to expect.

When purchasing VTSAX, you will pay the same price as anyone else who placed an order the same trading day as you. However, when you go to buy VTI, you could pay a different price depending on the time of day that you placed your order, even down to the minute.

If you are interested in trading quickly and frequently, then you might consider your suitability for VTI. However, if you intend to hold on to your investment for a while, then VTSAX may be the option for you.

Automatic Withdrawals and Investments

Only VTSAX will allow you to add investments to your fund regularly automatically. Utilizing VTI will require you to add each investment manually

For example, if you wanted to invest a certain percentage of each payment automatically, you could only do that with VTSAX. If you want to maintain tight control over investment, then VTI might be preferable. 

However, if you’re going to create your investment fund and then forget about it, VTSAX is much lower maintenance. Those looking for the convenient option should opt for VTSAX and stay away from VTI.

VTSAX vs VTI
This infographic is the property of How To FIRE LLC.

Advantages of VTI

In addition to the areas described above, VTI also holds an advantage in two key areas, which will now be discussed.

Transparency

Most ETFs disclose their portfolios on free and easily accessible websites year-round. Even though VTI does not fall into this category, it still provides a relatively high level of disclosure. 

Conversely, VTSAX, which is a mutual fund, is only required to report its standing quarterly. However, even this reporting comes with a 30-day lag.

VTSAX vs VTI Tax Efficiency

When securities are sold after accruing value, typically a capital gains tax must be paid. But VTI and VTSAX tend to amass less of this tax for a few reasons:

  1. They are considered index funds rather than actively managed mutual funds.
  2.  ETFs can be sold to another investor instead of being redeemed through the sale of securities like a mutual fund. When an authorized participant (AP) redeems shares of an ETF directly from the issuer, the issuer can give the AP the shares of the underlying stock. This transaction is not technically a sale; therefore, no capital gains are accrued. While some types of ETFs have more restrictions, such as fixed-income ETFs, this flexible fund has shown itself to be very tax-efficient.
  3. The Vanguard Group, Inc. patented a method of eliminating taxes on their mutual funds called heartbeat trading. This occurs when money is rapidly pumped into and out of ETF portions of a mutual fund equivalent, removing taxable gains for their mutual fund shareholders. Hence why VTSAX is also a tax efficient investment option.

The result? Tax deferral and greater compounding returns for investors.

In essence, these factors make the tax efficiency of VTI vs VTSAX identical.

Converting from VTI to VTSAX

If you really want to invest in VTSAX but don’t currently have enough money to meet the threshold for a minimum investment, then you can easily first invest in VTI and then transfer it to VTSAX once your balance reaches the $3,000 mark. 

This conversion can be done tax-free unless you’re holding within a brokerage account.

VTSAX vs. VTI: They're Identical Investments Otherwise

As far as asset classes and equities are concerned both VTI and VTSAX allow investors to put their money into the same stocks. As total stock market index funds, both options allow investors to invest in every individually publicly traded stock in the United States. 

The dividend yield, as well as the annual returns, are identical for the two funds. Investors looking to get the most stock market diversification possible from a single fund can invest in either VTSAX or VTI and get the same results.

Both of these picks offer no load fees and are considered low cost index funds – our personal favorite!

Expense Ratios

Both of these options carry low-cost expense ratios that are almost identical. VTSAX’s expense ratio is 0.04% and VTI’s expense ratio is 0.03%, which essentially means that investors will pay $1 more in management fees for every $10,000 that they invest. 

Don’t lose sleep over it.

Stock Examples

These funds are made up of over 3500 stocks with top holdings in some of the biggest corporate names.

Some examples that make up a majority equity of these funds include:

  • Apple Inc.

  • Microsoft

  • Facebook Inc.

  • Amazon.com Inc.

  • Berkshire Hathaway Inc.

  • JPMorgan Chase

  • Johnson & Johnson

  • Proctor and Gamble

  • Visa

How Many Funds Do You Need in Your Portfolio?

If you are not planning on needing to access the funds you are investing for a long time, then investing in a total market fund is likely all you need. Even though this type of fund typically exhibits the highest volatility, it also usually exhibits the highest annual return. Both VTI and VTSAX have been shown to yield higher returns than the S&P 500.

If you are going to be in it for the long haul and don’t mind waiting out high levels of volatility, then a single fund may be the perfect move for you. However, if you are looking to buy and sell frequently or want to access your money soon, then you might want to invest in multiple different kinds of funds.

You could also consider investing in international stocks and bonds to diversify your portfolio further so that it doesn’t only contain American investments. Non-American investments also tend to be less expensive.

However, it is essential to note that many American corporations have international holdings, which, in a way, helps to diversify the total stock fund investment. Since much of American business profits come from international sources, they are virtually international investments with less volatility than some other fully international options.

VTSAX vs VTI: FAQs

What is the VTSAX etf equivalent?

The ETF equivalent of VTSAX is VTI.

What is the VTI mutual fund equivalent?

The mutual fund equivalent of VTI is VTSAX.

Are VTI and VTSAX the same?

They are very similar but there are slight variations to them including expense ratios.

Does VTSAX or VTI pay a dividend?

Yes, they do both pay dividends!

Which one wins: VTSAX vs VTI tax efficient?

VTI and VTSAX are identical in tax efficiency due to Vanguard’s patented method of avoiding taxes.

VTSAX vs VTI: Learn More About Investing

If investing is an area that you want to learn more about, consider reading our FIRE Guide. This guide will help you to take control of your finances and develop a clear plan that will allow you to build freedom and flexibility in your life.

While investing may seem like a complicated endeavor, with a little bit of research, anyone can make smart choices to enhance their financial position.

VTI vs VTSAX vs VTSMX – generically buying a variation of these Vanguard funds won’t make a huge different in your outcome. The benefit is that these index funds provides exposure to all of the top 10 holdings equally.

And for those newer investors: you don’t really care about the tax cost ratio, share price, net assets, gains distributions or any of that more technical stuff. Buy it and hold it!

>> Want to see how investing could impact your retirement date? Check out our FIRE Calculator.

What investments have you chosen to optimize your portfolio? Have you ever invested in VTSAX or VTI? Let us know in the comments!