VTI vs VOO: what’s the difference and which ETF to choose

Diversification is the secret of trading. Period. There is no better way to ensure a safe return on a trade than having 10, 100, or 1,000 more assets in your portfolio. This is exactly what ETFs (exchange-traded funds) base their business model on: offering safe and reliable investments based on high diversification.

But which ETF to choose? And based on which parameters?

In the world of trading, two ETFs in particular could be the perfect choice for novices: the Vanguard Total Stock Market ETF (VTI) and the Vanguard S&P 500 ETF (VOO).

But what is the difference between VTI and VOO? Why choose one instead of the other?

What is an ETF?

An “exchange-traded fund”, aka ETF, is a special kind of asset that can be bought on the stock market like normal shares and financial securities.

Instead of being a single security, however, an ETF is a “basket” of different assets. The market performance of an ETF is therefore the sum of all the market performances by the assets contained inside.

For example, an ETF could contain shares of the 10 best-performing artificial intelligence companies. Each of these companies’ gain or loss will result in a relative gain or loss for the ETF.

ETFs are therefore the perfect asset for diversifying a portfolio. They are obviously much safer than normal securities because the negative gains of one company will likely be balanced by the profits of another. Except for times of extraordinary crisis (like a recession or a large geopolitical crisis), markets tend to grow, and therefore so should ETFs.

What are the differences between VTI and VOO?

If what I said about markets is true, then the more assets an ETF contains, the safer it is, right? Well, not exactly: it also depends on the market.

While it is true that most markets tend to grow over time, some grow more than others. The difference between VTI and VOO provides the perfect example.

VTI was created in 2001 and tracks the performances of almost every publicly traded company in the United States. The reasoning behind this ETF is that, except for a recession or two every decade, the US market will never stop growing and is therefore a perfectly safe investment.

On the other hand, VOO tracks the S&P 500, i.e. the index of the 500 largest American companies. Although much smaller in size, this ETF provided better returns over time because of the stunning growth of the S&P 500 companies.

As we can see, size is not all that matters. The VOO yields higher returns over time despite having significantly fewer holdings: 510 compared to 3842 of VTI. Both ETFs are managed by Vanguard, one of the world’s largest investment advisors.

VTI vs VOO: why choose one instead of the other?

As we said, VOO has yielded significantly higher returns than VTI. Indeed, since its inception in 2001, VTI has grown 272%, significantly less than the +293% since 2010 than VOO!

So why would anyone choose to invest in VTI instead of VOO? As always in investment: it’s all about risk. Anything that yields a higher return is, by definition, riskier. Bitcoin, for example, is an extremely volatile asset that, if timed correctly, could yield absurdly high returns.

This means that VOO is a slightly riskier investment than VTI. Indeed, the failure of an S&P 500 company would have much larger consequences than a small-medium regional bank going bankrupt. What would be worse for the market: the collapse of Apple or a random tech start-up that just received an IPO?