If you’re looking for investments with lower long-term risk, an index fund might be a solid addition to your portfolio. Let’s dive into the similarities and differences between VTSAX and VFIAX to see which one might be better for you.
Before making any investments, it’s important to do your homework. A good investment strategy involves diversifying your assets to manage risk and maximize returns. But how do you know which exchange-traded fund (ETF) will yield the highest returns and fit into your current portfolio? Which mutual fund offers the best growth potential, diversification, and dividends while staying within your risk tolerance?
An index fund is a type of mutual fund that tracks a financial market index, like the S&P 500. These funds follow a benchmark index regardless of market performance, offering broad market exposure. Index funds are a good addition to a stock portfolio because they are more diversified than individual stocks, reducing investor risk. They can also be a tax-advantaged way to earn passive income. Once you invest in an ETF, you can generally set it and forget it, letting passive investing work to increase your returns over time.
Two of the most popular index funds are the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and the Vanguard 500 Index Fund Admiral Shares (VFIAX). Both can serve as core holdings in a stock portfolio, but they follow different investment strategies.
VTSAX and VFIAX are large blend funds, combining value and growth stocks, which helps diversify your investments. Both funds offer Investor Shares and Admiral Shares. The main difference lies in the minimum investment required and the expense ratio. Admiral Shares require a minimum investment of $3,000 and have lower fees, while Investor Shares require a minimum of $1,000 in some cases but have higher fees. However, the investor shares in both funds are currently closed for investment.
VFIAX is a subset of VTSAX, consisting of 1/7th of the VTSAX stocks. VFIAX includes 509 stocks from VTSAX and 3,128 smaller stocks, providing exposure to the S&P 500 index. VTSAX, on the other hand, offers diversified exposure to nearly 4,000 stocks from the Nasdaq and New York Stock Exchange. Since its inception, VTSAX has averaged an annual return of 8.42%.
Both funds are available as ETFs and have low expense ratios of 0.04%, with a minimum investment of $3,000. VTSAX tracks the CRSP US Total Market Index, offering exposure to small, medium, and large-cap value and growth stocks. Since its creation in November 2000, VTSAX has averaged an annual return of 8.43%.
VFIAX tracks the S&P 500, focusing on the top 500 companies in the U.S. This fund is suitable for investors with moderate to high risk tolerance who want low-cost exposure to the stock market. VTSAX, with its broader market exposure, is ideal for long-term investors seeking lower risk.
The main difference between VTSAX and VFIAX is the index they track. VTSAX tracks the total market index, while VFIAX tracks the S&P 500. Both funds have similar returns and low volatility, making them excellent choices for long-term investments.
In summary, both VTSAX and VFIAX are solid mutual fund options for long-term investors. VTSAX offers broad market exposure, while VFIAX focuses on the largest companies in the U.S. Both funds have low fees and similar returns, making them good choices for anyone looking to achieve financial independence by retirement. Investing in either will likely benefit your investment goals.