The Vanguard S&P 500 ETF (NYSEMKT: VOO) and Vanguard Total Stock Market ETF (NYSEMKT: VTI) are two of the best core holdings investors can own. But there’s one reason I’d choose VOO right now.
One of VTI’s advantages could actually be a weakness right now.
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Both funds are dominated by large-cap stocks, including almost all of the biggest companies. The difference is what else the Vanguard Total Stock Market ETF holds.
While the Vanguard S&P 500 ETF sticks exclusively to that index, the Vanguard Total Stock Market ETF covers the entire investable U.S. stock universe, more than 3,500 companies in all.
That gives the impression of greater diversification (and there is based on the number of positions held), the fact that they’re both market cap-weighted means they’re actually very similar. There’s currently about 88% overlap between the two funds.
The biggest reason I’d choose the Vanguard S&P 500 ETF right now would be that inclusion of smaller companies.
Small-caps are particularly vulnerable to higher interest rates and it looks like that will be the case in the United States for a while. These companies tend to carry higher debt loads and that can disproportionately impact them negatively. Based on that, I think the Vanguard Total Stock Market ETF could experience a performance drag.
If forced to choose between the two, I’d go with the Vanguard S&P 500 ETF. I think its large-cap focus will help in an increasingly uncertain economy.
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