When choosing a fund, you may find that some of them look very similar. How do you compare them? What characteristics are the most important? With so many funds available, it’s important to know how to tell them apart. After all, a part of your future can go into them when investing.
In this case, we are comparing VTSAX vs VTSMX, some of the largest mutual funds in the world. Developed by the behemoth financial company Vanguard, these provide attractive investment opportunities for everyone.
Morningstar rated VTSAX and VTSMX with 4 stars, verifying their status as great mutual funds. This will not be a difficult matchup because they both have almost identical strategies but different expense rates.
While VTSMX is not open to new investors, that can change in the future. You should know that you can invest in an ETF run by Vanguard that follows the same strategy. Of course, we will go over what ETFs are and how they compare to these funds, specifically Vanguard’s VTI.
So it’s certainly worth learning about these to know how to compare your available options. Keep on reading to see what makes these some of the most popular investment opportunities.
What Is Vanguard?
Some companies have grown huge and developed great reputations in the financial services and mutual funds industry. The Vanguard Group is one of them.
Another interesting fact is that Vanguard positioned itself as the fastest-growing asset manager for seven consecutive years up to 2019. It reached an amazing $7 trillion in assets under management in early 2021. It is the second-largest assets manager, following BlackRock, that administers about $7.8 trillion.
The Vanguard Group started operating in 1975 and developed unique strategies for today’s special status. Serving over 30 million investors in 170 countries surely represents a lot of work, and Vanguard does it right. This monumental task employs more than 17,000 people in many countries.
Having achieved some of the lowest expense ratios for investment funds played a big role in Vanguard’s growth. It averages 0.09% in expenses across its mutual funds, an incredible feat that shows it knows what it is doing. To see how good this number is, consider that many index funds have expense ratios between 0.2% and 0.5%.
What Are Index Funds?
Index funds are a special type of mutual fund. All mutual funds gather money from investors and spend it in different securities to generate profits. This often includes many types of assets. In the case of Vanguard’s index funds, almost all of the investment is made on stocks.
But what does ‘index’ mean then? Index funds are created to follow, or ‘track’, a certain stock market index. According to several metrics, those indices measure a part of the stock market to reflect how that subset is doing.
In order to make this calculation, factors such as market capitalization and price/earnings ratio are included. The hard part of the work involved with index funds is buying and selling assets to follow the index closely.
There are many types of indices, selecting securities through different criteria. Below, you will learn about the CRSP US Total Market Index, the one followed by these Vanguard funds.
What Is the CRSP US Total Market Index?
The CRSP US Total Market Index provides the base for the work being done by VTSAX and VTSMX. Developed by the Center for Research in Security Prices, it is an index composed of nearly 4,000 assets. With more than a decade of uptime, it has proven to serve its purpose very well.
The CRSP US Total Market Index represents nearly all of the investable US stock market. It includes stocks with all capitalization levels, from micro to large-cap, usually traded on the NY Stock Exchange and Nasdaq.
Indices like these follow a strategy that includes many different assets to diversify. This tends to stabilize risks and rewards, achieving performance similar to the performance of the market as a whole.
This index uses various methods to maintain turnover low and still be a good representation of the market. It is reviewed every quarter, which reassesses each security according to eligibility, investment potential, and capitalization. This process ends on the first Friday of March, June, September, and December each year, on so-called ranking days.
However, many factors such as price movements, corporate actions, and security additions and deletions are also considered for daily changes. This assures indexes stay updated swiftly in this fast-paced environment with the best possible accuracy.
What Strategy Do VTSAX and VTSMX Funds Follow?
Now you know the key properties of index funds and how the CRSP US Total Market Index works. You are now ready to learn about the strategy of VTSAX and VTSMX.
Both follow a similar strategy by tracking the performance of that index. This methodology aims to reduce risk by investing in a wide selection of stocks. This approach assumes that the market as a whole will usually increase in value and distribute earnings.
On the contrary, investing in particular companies or sectors of the market represents more risks of seeing those assets devaluate.
Of course, these large blend funds can be greatly outperformed by funds with more specific investments through particular timeframes. If you take Vanguard’s VITAX fund, you will see last year’s returns were 34.51%. VITAX reflects the performance of the information technology sector. This is better than VTSAX’s 26.49%, but it does not mean VITAX will always do better.
If you read the explanation about index funds earlier in this article, you will know some things about how they work.
As expected, these funds have to buy and sell securities to stay close to what the indices say. That often represents higher costs and more taxes, meaning it’s best to keep those transactions to a minimum. The rate at which securities go in and out of these portfolios is called the turnover rate.
So after returns, this is one of the most important metrics for investors. Keep in mind some of the taxes generated by these operations will not be included in reported returns. These funds exhibit an 8% turnover rate, which is reasonable, but you should keep an eye on that number.
The main difference between these two funds is the class of shares offered. While these funds share strategy, minimums and provide similar performance, the results will vary due to expense ratios.
What Kind of Risks Are Associated With VTSAX and VTSMX?
Investments always carry associated risks, and these funds are no exception. As markets fluctuate, the assets you buy can go through value drops, in which case you will lose money. This is the reason why your investments should be appropriately diversified, even when you go for large blend funds.
First, there’s stock market risk, which means the market as a whole can see price drops. This will surely reflect on the prices of these funds. Even if a particular sector significantly declines, these funds can suffer.
As you probably know, the market usually moves in cycles, meaning you can often wait it out. This is why you should probably avoid investing money that you need to recover quickly.
Then, there’s index sampling risk. This happens when a fund fails to track an index correctly. In this case, you will see differences between the performance of the funds compared to that of the indices. This rarely happens, and fund managers know to correct it quickly, but it can result in losses.
What is VTSAX
Now we will learn the specifics about Vanguard Total Stock Market Index Fund Admiral Shares. This fund also goes by VTSAX and is a great standard against which you can compare other funds.
It distinguished itself from VTSMX because it offers Admiral Shares instead of investor class shares. These end up paying lower fees due to expense ratios being lower. While some funds require minimum investments of $10,0000 to $50,000 to acquire Admiral Shares, VTSAX does not. This fund can get you Admiral Shares by investing a low minimum, at only $3,000.
Even when fees seem to be very low with Vanguard, Admiral Shares provide extra savings. These have expense ratios 82% lower than the industry average.
When investing in VTSAX, shareholders have to pay 0.04% in management fees and nothing else. That means no 12b-1 distribution fees and no other expenses. Check the section about other fees below to see how to avoid possible additional fees.
What Is VTSMX?
The first thing to know about VTSMX is that it is unavailable to new investors. It may become available again. Vanguard suggests investors see its full list of funds and ETFs, some of the best alternatives. In general, VTSAX is a much better option, but stay tuned if you prefer VTSMX for some reason.
The full name of this fund is Vanguard Total Stock Market Index Fund Investor Shares. It also tracks the CRSP US Total Market Index but charges more expensive fees. This is because Investor class shares don’t benefit from the low fees of Admiral Shares.
Shareholders of VTSMX have to pay 0.13% in management fees and 0.01% in other expenses. Consider this fund does not charge 12b-1 distribution fees, totaling 0.14% per year in expenses. While better in fees than many index funds, it’s considerably more expensive than VTSAX.
What Other Fees Does Vanguard Charge?
When investing in one of these funds, you should know that you will be paying little to no extra charges. There are no sales charges, purchasing fees, or redemption fees.
You may have to pay a $20 yearly account service fee, but there are a few simple ways to avoid it. If you have over $10,000 in your account, you can forget about those fees, as they will be waived. Having over $50,000 in qualifying Vanguard assets will also avoid this fee.
Otherwise, you can sign up for Vanguard’s e-delivery service and have this fee eliminated. This means you will receive statements, annual privacy notices, confirmations, and fund reports electronically.
Keep in mind that this fee can be charged every year to each account you have with Vanguard. Make sure to hit that e-delivery option!
Other brokers may offer similar options, but they will probably charge their fees. Pay attention before accepting an offer to avoid unnecessary surprises.
What Is the Alternative to VTSAX and VTSMX Funds?
If you don’t know what ETFs are, you may want to read further and learn about an additional investment option.
ETF means Exchange Traded Fund and is a great option available as an alternative to many mutual funds. They can also track an index, sector, or other assets, but can be bought or sold in stock exchanges. They can be structured for a variety of investment strategies.
In this case, you can buy VTI, which is Vanguard Total Stock Market ETF. This ETF follows the same index we saw before, meaning it should see similar changes in response to market movements.
It is an open-ended fund, meaning it has no limit on the number of shares that you can sell. While the turnover rate of this fund is 8%, like in VTSAX, it has lower fees. In total, this fund charges an annual 3% fee for operating expenses.
Keep in mind other commission or brokerage fees may apply depending on where you buy this ETF.
Conclusion on VTSMX vs VTSAX
Mutual funds represent a great opportunity for beginners to diversify their portfolios, gaining exposure to several industries. VTSAX and VTSMX are some of the best options for mutual funds.
At this time, VTSMX is a closed fund that requires a minimum investment of $3,000 you might not be able to invest in, depending on when you read this article. On the other hand, VTSAX requires a $10,000 minimum initial investment.
These two factors may make these funds difficult to get into for those who are just starting their investing journey. Overall, VTSMX will be more accessible to investors than VTSAX, making them the favorite option for investors at a time when it has been open in the past.
If none of these funds convinces you or you can’t access them, worry not. As we said before, there are several investment alternatives you can take advantage of. Make sure to check our investing section to find out more!
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