When you’re exploring the vast world of Exchange-Traded Funds (ETFs), you’ll come across countless options. Two such options, VT and VTI, stand out. They are both top-notch offerings from the Vanguard Group. Navigating the “VT vs VTI” maze can be a tad perplexing, given the similarity in their monikers. However, it’s essential to note that these two funds cater to different investment goals, each with its distinct charm.
What is the Key Difference between VT and VTI?
The key difference between VT and VTI lies in the indexes they track, which in turn affects the market exposure they offer to investors.
First up is the Vanguard Total World Stock ETF, also known as VT. This fund is designed to follow the FTSE Global All Cap Index closely. The index is globally inclusive, covering large, mid, and small-cap stocks from both developed and emerging markets. By investing in VT, you’re essentially buying a small part of the worldwide equity market, which means you’ll have a highly diversified portfolio.
Now, let’s shift our focus to the Vanguard Total Stock Market ETF, commonly known as VTI. Contrary to VT’s worldwide orientation, VTI seeks to emulate the performance of the CRSP US Total Market Index. So, if you decide to put your money in VTI, your portfolio will consist solely of U.S. stocks, excluding international markets. This comprehensive index tracks U.S. stocks of all sizes, spanning mega, large, small, and micro-cap sectors across 11 different industries.
Composition Differences: VT vs VTI
VT and VTI diverge considerably in the number of holdings they carry and where these investments are geographically based.
VT stands true to its name, offering a diverse global exposure. It holds more than 8,500 distinct stocks from all around the world.
On the other hand, VTI comprises over 3,500 public companies, all based in the US.
Looking at their leading holdings, VTI’s top ten investments make up around 23% of its total assets. This showcases its high exposure to the largest players in the US market. In contrast, VT’s top ten holdings account for only about 14% of its total assets. This implies a more spread-out risk, without any one region or company holding too much sway.
While VTI focuses solely on American stocks, VT’s portfolio is a rich blend of international stocks. Approximately 57% of its composition is US-based companies. But it also includes 7% from Japan, a tad above 4% from the UK, close to 3% from France, and a significant 10% from emerging markets.
Expense Ratios: VT vs VTI
Expense ratios, presented as a percentage of your total investment, help cover the fund’s administrative costs. A smaller ratio means fewer charges, keeping more of your investment intact.
VT’s expense ratio is 0.07%. On the other hand, VTI flaunts a slightly lower ratio of 0.03%. This difference suggests that owning VT incurs a bit more cost than VTI.
However, it’s important to note that both funds still sport pretty low expense ratios. To give you a sense of scale, if you were to invest $10,000 in VT, you’d pay $7 towards administrative fees. For the same investment in VTI, your fees would be just $3.
Historical Performance: VT vs VTI
While past performance can’t assure future results, it does help set expectations. To compare VT and VTI, we’ll delve into their performance history and how they’ve navigated the changing economic landscape over time.
Examining the performance of global and American stocks over past decades paints a picture of a competitive dance. US companies have usually led the pack, but international companies have been hot on their heels.
VTI has often outperformed VT, especially during times of strong US market performance. In the 5- and 10-year periods before the Covid-19 pandemic, the strength of the American market led to higher returns for VTI.
However, VTI, firmly rooted in the US market, is more sensitive to domestic economic swings. Its performance hinges on the triumphs and setbacks of American corporations.
On the flip side, with its broad global portfolio, VT holds an advantage regarding volatility. Its diverse investments help soften the impact of individual company performance, offering investors a smoother ride. Furthermore, this broad diversification has often allowed VT to deliver higher risk-adjusted returns than VTI.
The Final Decision: How to Choose?
Your choice between these two will depend on your personal investment strategy and the makeup of your current portfolio.
The crux of your decision rests on your preference for global diversification versus a focused bet on the US market. If your holdings are mostly US-based and you’re keen on expanding your investment reach, VT could be a fitting choice with its global exposure.
On the other hand, if your portfolio already has a good mix of international stocks, and you want to tap into the US market’s potential, VTI might be your go-to choice. Essentially, the decision between VT and VTI comes down to the market exposure you desire and your comfort with risk.
Yet, the wonderful aspect of investing is its flexibility. There are no rigid rules, and you’re at liberty to forge your own way. As a result, you might consider mixing both VT and VTI in your portfolio. Such a blend could potentially give you the best of both worlds, balancing the strength of the US market with the diversification benefits of global exposure.