An index fund is an excellent way to diversify your investment portfolio instantly. With a single purchase, you can get exposure to nearly the entire U.S. stock market.
While it may seem as if all index funds are essentially the same, they have differences. For instance, index funds use different benchmarks, such as the S&P 500, Dow Jones Industrial Average, or the CRSP US Total Market Index.
Index funds can also refer to mutual funds or exchange-traded funds (ETFs). ETFs tend to be more affordable than mutual funds and have lower fees because they are passively managed.
In addition to being simple to buy and sell (these are very liquid investments), ETFs typically have very low expense ratios (far below those of mutual funds) and are tax-efficient investments.
VTI and SPY are two of the most popular index fund ETFs available today among expert and beginner investors. They are both are trusted funds that perform well and have many of the same top holdings.
However, these funds also have a few key differences. The funds are similar enough that you likely will want to choose one instead of both, so evaluating the differences is essential.
Let’s dig into the similarities and differences between VTI and SPY, their top holdings, expense ratios, dividend yields, and more. Finally, we’ll discuss which fund is likely the better one for you to buy.
What is VTI?
VTI is the Vanguard Total Stock Market ETF. It’s passively managed and run by the Vanguard Equity Index Group. The ETF was incepted on 5/24/2001.
This total stock market ETF includes stocks regularly traded on the New York Stock Exchange. It is a market capitalization-weighted index fund, or “market-cap-weighted index fund.”
VTI consists mainly of large-cap stocks and includes smaller mid-, small-and micro-cap companies. These are U.S. stocks, with only 0.1% of the ETF consisting of foreign holdings.
It has around $290B of assets under management (AUM). AUM is the total market value of the investments managed, and the formulas to determine AUM can vary by company. Funds with larger AUM are usually more easily traded.
VTI has a four-star Morningstar rating. VTSAX is the mutual fund equivalent of VTI.
Related: VTSAX vs VFIAX
What is SPY?
The ETF SPY is also known as the SPDR S&P 500 ETF Trust. Being a Standard and Poor Depository Receipt (SPDR) means it’s a specific type of ETF issued by the State Street Global Advisors.
SPDRs, sometimes called spiders, are ETFs based on an index. It’s essentially a way to own an entire index through a single security. As a unit investment trust, SPY must try to completely replicate an index, in this case, the S&P 500.
SPY is the largest ETF globally and one of the most actively traded. Its inception date was 01/22/93, making it the first-ever index ETF.
SPY usually has the highest trading volume and greatest assets under management than other ETFs. Currently, it has around $400B in assets under management. Funds with high trading volume are more liquid, which helps if you’re an active investor.
SPY consists of 99.91% U.S. stocks and 0.09% Canadian ones. It’s a large-cap ETF that is heavily weighted in technology companies. SPY has a four-star Morningstar rating.
What Benchmarks Do These Index Funds Use?
VTI uses the Center for Research in Security Prices (CRSP) U.S. Total Market Index as its benchmark.
This index represents nearly 100% of the investable U.S. stock market, which takes away the pressure to guess which stocks will rise the highest. Total stock market indexes usually track thousands of funds with varying market capitalizations.
To be added to the CRSP index, a stock must have a market value of at least $15 million, have at least 12.5% of its shares publicly traded (float shares), be for profit, and not have stretches of no trading that last over ten consecutive days.
The SPY fund seeks to track the Standard & Poor’s (S&P) 500 Index, containing 500 large-cap U.S. stocks. The S&P 500 is a standard benchmark and is known to indicate the overall financial health of the economy.
Although the S&P 500 contains far fewer stocks, its returns are similar to total stock market index funds. Since both indexes are heavily weighted towards large-cap stocks, the returns are correlated, and the total market fund is only a bit more diversified.
To be part of the S&P 500, a company must have a minimum market cap of $13.1 billion, have been publicly traded for at least one year, and have most of its shares be publicly traded.
How has VTI vs. SPY Performed?
Since its May 2001 inception, VTI’s market price has risen 8.5%. However, the last few years have experienced more rapid growth.
It’s up 14.21% over the last ten years, 14.64% over the last five, and 17.44% over the last three. Over the last year, it’s up 11.83%.
Since SPY’s inception, it’s achieved an average annual return of 10.65%. Over the last ten years, the fund had an average annual return of 16.01%. Its average three-year return is 18.51%.
While both funds have had steady returns, SPY has performed slightly better than VTI. However, during some periods, VTI’s performance exceeds SPY’s.
Timing is everything. Rather than trying to time the market, it’s better to choose an index fund to hold long-term.
Remember, past performance can be a good indicator of future performance, but it is no guarantee.
Invest in Individual Stocks or Index Funds?
Because VTI and SPY (and similar investments) come with built-in diversification, they involve less risk than individual stocks and bonds.
In the long run, index funds which follow the S&P 500 return around 10%, the historical annual market return since the 1920s.
While you can’t capture alpha (outperforming the market) like you might with individual stocks you find using the best stock research apps and software, you also won’t do worse than it.
In my own assessment, it’s hard to argue with the attractiveness of a 10% average annual return which costs you almost nothing to receive over long periods of time.
However, if you’d like to add some room for market outperformance to your portfolio, you can invest in some stock picking services to attempt to beat the market.
On the other hand, while individual stocks can (and sometimes do) go down to zero, this hasn’t ever happened with index funds.
Instead, index funds represent the most straightforward, cheapest, and dependable way to see strong long-term returns in your portfolio.
VTI vs. SPY Similarities
VTI and SPY are both popular funds among long-term investors, and they have excellent performance histories.
The top holdings for VTI and SPY are the same (though with slightly different percentages for each). Technology is the heaviest weighted sector for both.
VTI contains all the SPY stocks, so it essentially has SPY within it.
MSCI Inc. is the world’s biggest provider of Environmental, Social and Governance (ESG) Indexes.
Their ratings tell investors how socially responsible an investment fund is so they can ensure their values and investments are aligned.
MSCI ESG Research LLC’s ratings for both VTI and SPY are A.A., making them ESG leaders.
You can buy either fund through most major brokerage firms, such as Schwab or Fidelity.
VTI vs. SPY Differences
VTI has a different underlying index than SPY. VTI tracks the CRSP US Total Market Index, and SPY uses the S&P 500. As a result, the ETFs also differ in how much of them are comprised of small-cap stocks, mid-cap ones, and large caps.
VTI consists of 66.4% large-cap stocks, 3.3% medium/large caps, 15.3% mid-cap, 6.6% medium/small-cap, and 8.4% small-cap stocks. It provides broad exposure to both large and smaller companies.
Meanwhile, SPY is 98.56% large caps and only 1.44% mid-cap stocks. It has no small-cap stocks.
While both ETFs have been performing well, SPY has performed better than VTI. SPY’s return over the last three years is 18.51%, and VTI’s is 17.44%.
ETFs with higher turnover rates are more actively managed, leading to higher costs and taxes. SPY has a higher turnover rate, which is 4.00%. VTI’s turnover rate is only 2.80%.
Expectedly, SPY’s expense ratio is higher than VTI’s. SPY’s is 0.0945%, while VTI’s is only 0.03%.
However, while you lose more profits to SPY’s higher expense ratio, it has a slightly higher dividend yield than VTI. SPY’s dividend yield is 1.31%, while VTI’s sits at 1.27%.
Top 10 Holdings for VTI/VTSAX
VTI and VTSAX (VTI’s mutual fund equivalent) have 4,136 holdings and a turnover rate of 2.80%.
It’s top ten holdings include (in order):
- Apple Inc. (AAPL) 6.00% (Technology Hardware, Storage & Peripherals)
- Microsoft Corp. (MSFT) 5.10% (System Software)
- Alphabet Inc. (GOOGL) 3.40% (Interactive Media & Services)
- Amazon Inc. (AMZN) 2.80% (Internet & Direct Marketing Retail)
- Tesla Inc. (TSLA) 1.70% (Automobile Manufacturers)
- Meta Platforms Inc. (FB) 1.60% (Interactive Media & Services)
- NVIDIA Corp (NVDA) 1.30% (Semiconductors)
- Berkshire Hathaway Inc. (BRK.B) 1.20% (Multi-Sector Holdings)
- Johnson & Johnson (JNJ) 1.00% (Pharmaceuticals)
- UnitedHealth Group Inc. (UNH) 1.00% (Healthcare)
The top sectors are technology (28.40%), consumer discretionary (15.30%), industrials (13.00%), health care (12.40%), financials (11.50%), and consumer staples (5.00%).
The net assets of the ten largest holdings are 25.1%. This sector distribution aligns well with the benchmark it follows.
Top 10 Holdings for SPY
SPY has 505 holdings and a turnover rate of 4.00%.
SPY’s top ten holdings include (in order):
- Apple Inc. (AAPL) 6.99% (Technology Hardware, Storage & Peripherals)
- Microsoft Corp. (MSFT) 5.95% (System Software)
- Amazon Inc. (AMZN) 3.79% (Internet & Direct Marketing Retail)
- Tesla Inc. (TSLA) 2.22% (Automobile Manufacturers)
- Alphabet Inc. (GOOGL) 2.20% (Interactive Media & Services)
- Alphabet Inc. (GOOG) 2.04% (Interactive Media & Services)
- NVIDIA Corp (NVDA) 1.70% (Semiconductors)
- Berkshire Hathaway Inc. (BRK.B) 1.69% (Multi-Sector Holdings)
- Meta Platforms Inc. (FB) 1.31% (Interactive Media & Services)
- UnitedHealth Group Inc. (UNH) 1.26% (Healthcare)
The top sectors are technology (25.60%), financials (13.75%), health care (13.40%), consumer cyclical (11.67%), communication (9.65%), and industrials (8.15%).
What are the Stock Market Cap Weightings for Mid Cap Stocks on VTI and SPY?
Mid-cap companies usually have a market value between $2 billion and $10 billion. They tend to be more volatile than large-cap stocks but have higher growth potential.
VTI consists of 3.9% mid/large-cap stocks, 14.9% mid-cap stocks, and 6.1% mid/small-cap stocks. SPY is only 1.44% mid-cap stocks, and the rest are large caps.
What are the Stock Market Cap Weightings for Large Cap Stocks on VTI and SPY?
Large-cap companies typically have a market value of over $10 billion.
These tend to be well-established companies (often called blue-chip stocks) with an above-average chance of surviving economic downturns. There is less chance for extreme growth in exchange for the increased safety of purchasing these stocks.
VTI is 66.9% large-caps. The vast majority of stocks comprising SPY are large caps. Large-cap stocks make up 98.56% of SPY.
What is the Expense Ratio for VTI?
ETF’s expense ratios are the fees investors are charged that cover portfolio management, marketing, administration, and more. The expense ratio for VTI is 0.03%, one of the lowest rates available.
What is the Expense Ratio for SPY?
SPY’s expense ratio is 0.0945%. The fund’s expense ratio is considered a low ratio for an ETF and much lower than the average mutual fund.
What are the Dividend Yields for VTI and SPY?
A dividend yield is an amount a company pays out in dividends each year relative to its share price. The dividend yields for SPY and VTI are similar, but SPY’s is slightly higher.
VTI’s dividend yield is 1.27%. SPY’s dividend yield is about 1.31%.
Both funds pay out dividends quarterly.
Which Index Fund Should You Buy?
As VTI and SPY have many of the same top holdings, most successful investors choose to focus on just one or the other.
Too much overlap in your investments means your portfolio isn’t diversified, and a diversified portfolio lowers your risk.
But if you should only buy one of these index funds, which is better? The fund for you depends on your goals and investment style.
VTI is a Vanguard total stock market ETF and contains far more stocks than SPY (thousands compared to hundreds), so this is better if you want broad exposure to the equity market.
Since its asset allocation includes some smaller companies, it might be considered a bit riskier than SPY, which also means it has a higher reward potential.
VTI also has a lower expense ratio than SPY, which could save you money in the long run.
Vanguard is one of the most popular brokerage firms, and if you already use them for other investments, it may be convenient to choose VTI.
It’s also a more affordable ETF, so buying shares of VTI may mean you can have more of your money fully invested. However, this is irrelevant if you use an investment platform that lets you buy fractional shares of ETFs.
SPY may be better for dividend investors seeking to create a solid passive income.
It has a slightly higher dividend yield percentage than VTI (1.31% vs. 1.27%). Since SPY costs more than VTI, even if the percentage were the same, you would be making more dividend earnings with SPY.
Since SPY’s asset allocation doesn’t contain any small-cap stocks, it’s slightly less volatile than VTI, which more conservative investors appreciate. Additionally, SPY usually performs a bit better than VTI.
You may also choose to discuss your portfolio with a registered investment adviser. The Investment Advisers Act requires advisers to act primarily on behalf of the clients.
Always make sure to do your due diligence before making investment decisions.
These funds are a wise choice for your brokerage or retirement accounts, especially for long-term investors.
Both VTI and SPY instantly diversify portfolios, giving you broader exposure to the market than buying individual stocks alone. These are particularly wise options for long-term investors.
Track Your Net Worth with Either Exchange-Traded Fund
Regardless of whether you choose to invest in VTI or SPY, you’ll be happy you made an excellent long-term investment for building wealth.
Additionally, it’s always a smart idea to diversify your portfolio, whether that be with more standard investments (such as real estate) or more alternative investments.
It’s an online financial advisor with both robo-advisor algorithms and human financial advisors. For access to human advisors, a minimum balance of $100,000 is required, however, the app itself is free and valuable even without the human advisors.
Getting started takes four steps, including:
- Link all of your external financial accounts to get a comprehensive view of your finances.
- Speak with an advisor about your risk tolerance, investment goals, and future major expenses.
- Create a plan. Their advisors will help you build an investment plan that fits your needs.
- Start investing and work with Personal Capital’s award-willing tools.
The more familiar you are with your expenses, the better you can manage them and start to make your money work for you.
However, if you want a go-it-alone strategy and have VTI or SPY represent a major investment pillar in your portfolio, you might not need the financial advising which comes paired with the app.
If this sounds like you, the free app provides useful content for tracking your net worth, expenses, cash flow and more across time. This app functionality alone represents a valuable free tool for progressing toward financial independence.
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About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.