Do you want to reach Financial Independence?
Do you want to build your wealth and finally have your FU money?
Well, you simply have to invest your money in a proper way.
Here we will analyze and compare two of the largest index fund ETFs: VT vs VTI, and find out which is the best choice for you.
How to invest: index funds.
You are not Warren Buffet, so avoid stock picking.
For the average investor (like you, and like me), investing in index funds is usually better than stock picking and has various benefits:
1. Eliminate individual stock risk.
Individual stocks can suddenly plunge to zero.
Mutal funds cannot because they are composed of a large number of stocks. The S&P500 Index, in 50 years, is composed of only 86 of the original 500 companies.
Most of the other 414 company simply don’t exist no more.
2. Keep Low Your Expenses.
Before you buy a share of a mutual fund, take a look at the Total Expense Ratio (TER).
Costs and fees have a huge impact on the return of your investment.
Assume you have invested $ 25K and your investment has an annual average ROI of 6 % for 30 years. Also, assume a 1% TER.
You’ll lose $ 35k of your gains because of the fees!
3. Diversification is important.
The best way to invest for the average investor is to hold the entire market.
Some investors buy an S&P500 index fund, others a Total U.S. Stock Market index fund, other a Mixed US/ International index fund.
However, diversification is your Kevlar bulletproof jacket when you are investing.
You can obtain the best diversification by choosing an international index fund.
There is always a certain risk in investing only in companies from just one country.
Don’t keep all your eggs in one basket.
Concentrating all your assets in a single country is risky.
Wars, revolts, geopolitical troubles, inflation, debt crisis, can easily wipe out your investment.
By diversifying your asset allocation in more than one country you can avoid this risk.
A single country can’t consistently outperform forever.
The simplest way to diversify your investments internationally is to buy a Total World index fund, and you will easily hold the stocks of almost 8-10,000 companies operating in different sectors, industries, and countries of the world.
Although U.S stocks have done very well in the last decade, you better have geographically diversified assets in your portfolio.
Geographic diversification can protect you and your investment from a negative economic cycle impacting one single country.
ETFs Comparison: VT vs VTI.
Now it’s time to compare the pros and cons of investing in a total U.S. stock market fund vs. a total world stock market fund, so we will analyze two major index funds ETF by Vanguard:
VT: Vanguard Total World Stock Market ETF
VTI: Vanguard Total U.S. Stock Market ETF
What is VT?
VT (Vanguard Total World Stock ETF) is an index fund composed of a mix of international and U.S. public companies’ stocks.
It holds shares of many public company in the world (around 9000).
This index fund tracks the performance of the FTSE Global All Cap Index, which covers both developed and emerging markets.
Total Expense Ratio (TER) is very low: 0.08%.
Key informations.
- ETF facts: Asset class International/Global Stock Category World Stock IOV
- Ticker symbol VT.
- Expense ratio 0.08%
Product summary
- Invests in both foreign and U.S. stocks.
- Seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets.
- Has high potential for growth, but also high risk; share value may swing up and down more than U.S. or international stock funds.
- Only appropriate for long-term goals.
Characteristics (04/30/2021)
| Fund total net assets | $28.9 billion |
| Number of stocks | 9045 |
| Net assets of 10 largest holdings | 13.7% |
Top 10 largest holdings
(13.70% of total net assets) as of 04/30/2021
| 1 | Apple Inc. |
| 2 | Microsoft Corp. |
| 3 | Amazon.com Inc. |
| 4 | Alphabet Inc. |
| 5 | Facebook Inc. |
| 6 | Tesla Inc. |
| 7 | Taiwan Semiconductor Manufacturing Co. Ltd. |
| 8 | Berkshire Hathaway Inc. |
| 9 | Tencent Holdings Ltd. |
| 10 | JPMorgan Chase & Co. |
Market allocation (% of common stock) as of 04/30/2021
What is VTI?
VTI – Vanguard Total Stock Market ETF is a low cost index fund ETF.
It is composed of only U.S. based public companies.
It holds stock of companies of the entire US market, which is around 3,800 and includes big-cap, mid-cap and small-cap companies.
It tracks the performance of the CRSP US Total Market Index Fund.
- Characteristics
as of 04/30/2021
| Number of stocks | 3781 |
| Fund total net assets | $1.2 trillion |
| Net assets of 10 largest holdings | 22.9% |
| Foreign holdings | 0.1% |
- Month-end 10 largest holdings
(22.90% of total net assets) as of 04/30/2021
| 1 | Apple Inc. |
| 2 | Microsoft Corp. |
| 3 | Amazon.com Inc. |
| 4 | Alphabet Inc. |
| 5 | Facebook Inc. |
| 6 | Tesla Inc. |
| 7 | Berkshire Hathaway Inc. |
| 8 | JPMorgan Chase & Co. |
| 9 | Johnson & Johnson |
| 10 | Visa Inc. |
VT vs VTI Comparison
| VT | VTI | |
|---|---|---|
| Fund Type | Exchange Traded Fund (ETF) | Exchange Traded Fund (ETF) |
| Expense Ratio | 0.08% | 0.03% |
| Minimum Investment | The price of one share | The price of one share |
| Number of Stocks | 9,045 | 3,781 |
Similarities:
- VT and VTI are both ETF
- Both can be easily purchased with a minimum investment (the price of 1 share)
Differences:
- VT has a higher expense ratio (0.08%) than VTI (0.03%)
- VT holds more stocks (9,045) than VTI (3,781)
- The top 10 holdings of VT represent a much smaller percentage of total fund assets, compared to VTI.
Research demonstrated that since the beginning of the bull market in 2009, U.S. stocks have outperformed international stocks, causing some investors to question the merits of global asset allocation.
But history tells us that this outperformance can’t last forever.
Investing in a globally diversified portfolio has historically produced better risk-adjusted returns than investing only in a total U.S. stock market portfolio.
Note that the top 10 holdings of each of these fund are quite similar.
This is simply because the world’s largest company in the world are from the U.S.A. :
| VT | VTI |
|---|---|
| 1. Apple | 1. Apple |
| 2. Microsoft | 2. Microsoft |
| 3. Amazon | 3. Amazon |
| 4. Alphabet | 4. Alphabet |
| 5. Facebook | 5. Facebook |
| 6.Tesla Inc. | 6. Tesla |
| 7. Taiwan Semiconductor Manufacturing Co. Ltd. | 7. Berkshire Hathaway |
| 8. Berkshire Hathaway Inc. | 8. JP Morgan Chase |
| 9. Tencent Holdings Ltd. | 9. Johnson & Johnson |
| 10. JPMorgan Chase & Co. | 10. Visa |
VT vs VTI. Which is better?
Here’s a summary of this article:
1.If you want to have a good diversification with low costs, you have to invest in index funds.
2. VTI will give you exposure to the entire US stock Market,
3. VT will give you international exposure.
4. U.S. stock Market has performed better since 2009, but this can’t last forever.
5. investing in a global portfolio has produced better risk-adjusted returns than investing in a total U.S. stock market portfolio.
Conclusion: VT vs VTI. What’s the best choice.
After this analysis, we must take our conclusion:
Since 2009, U.S. stocks have outperformed international stocks, but this outperformance can’t last forever.
Investing in a globally diversified portfolio has produced better risk-adjusted returns than investing only in the U.S.
If you decide to invest only in VTI, you accept the risk that comes with investing only in one country. You are basically putting all your eggs in the same basket.
If you want to invest exclusively in VT, you’ll have in any case an international diversification.
In both cases, you will be paying extremely low fees and you’ll be diversifying your investments more than picking individual stocks.
Investing in index funds is one of the best ways to build your wealth in the long term, so if you want great long-term results, you only have to choose wisely your asset allocation, be consistent and remain patient.
