VTI vs. VOO: Which Vanguard ETF Is the Better Pick During a Market Sell-Off

TradingKey - When it comes to investing in a volatile environment, investors often choose to use a low-cost and diversified exchange-traded fund (ETF) from Vanguard. Their two most popular ETFs are the VTI (Vanguard Total Stock Market ETF) and VOO (Vanguard S&P 500 ETF). When you look at both funds, they really seem similar - they both have the same expense ratio, they have less than a 1% difference between annualized returns, and their portfolios are extremely similar to one another. However, the reality is that these two ETFs are targeting completely different parts of the U.S. equity market. These small differences in exposure can have a huge effect on which ETF will outperform the other in a declining market.

The Core Structural Differences Between VOO and VTI

VOO and VTI are both U.S.-only ETFs with market cap weighting, so their prices will always have a high correlation over time. The main difference in these two ETFs is in the markets they cover; VOO tracks the S&P 500 Index, which represents a benchmark of large-cap U.S. firms. The VOO has 504 total stocks in its fund. VTI tracks the entire U.S. stock market and has 3,507 stocks in its fund, which includes large-cap, mid-cap, and small-cap stocks.  The difference in the number of holdings creates a significant difference in the portfolio differences: approximately 88% of VTI's holdings are identical to those of VOO, while all of the remaining 12% represents mid- and small-cap stocks are not included in the S&P 500 ETF. The return differences between VOO and VTI are driven primarily by the 12% difference between the two portfolios during extreme market conditions, such as severe declines in the market.

Key Metrics and the Drivers of Long-Term Performance Divergence

VOO and VTI are basically interchangeable on the vast majority of core metrics that an investor would be interested in, as both have ultra-low expense ratios at just 0.03% per year — among the most affordable ETF options available — and both provide identical dividend yields of 1.2%. However, their scale and long-term total return differ significantly, with VOO at $910B in assets under management vs VTI at $615B, and VOO’s 10-year average annual return of 15% is slightly higher than VTI’s average annualized return of 14.5% during the same period. The small performance discrepancy between VOO and VTI can be primarily attributed to their different allocations to the large-cap technology companies that have consistently produced most of the performance for U.S. equities over the last several years, driven by the recent global artificial intelligence (AI) boom.

Both exchange-traded funds (ETFs) have sizeable holdings in the “Magnificent Seven” large-cap tech leaders. However, because of its sole focus on large caps, VOO has higher weightings than VTI for these top-performing companies than VTI does. For example, Nvidia comprises 7.6% of VOO and 6.4% of VTI holdings and Apple 6.7% of VOO’s holdings and 5.9% of VTI’s holdings, while Microsoft comprises 4.9% and 4.4%, respectively, of VOO and VTI. The higher concentration of VOO on the highest-performing large-cap tech stocks has contributed to VOO’s slightly superior long-term performance, while VTI’s greater diversification will give VTI a better opportunity to outperform in periods when large-cap tech does not lead most of the equity market’s gains.

How VOO and VTI Behave During Market Sell-Offs

For investors who are looking to buy into a down market, the most important consideration is which of those two funds will survive better while stocks fall in value. This depends on how well small and mid cap stocks do compared to large caps during a selling spree. In almost all broad market declines, small cap stocks significantly under-perform their large cap counterparts. In most broad market selling environments, both large caps and small caps will eventually decline in terms of dollar value; however, during market instability and volatility, many investors will choose to invest in large cap companies because of their stability and continued profitability relative to small cap companies where they continue to behave very speculatively with very little predictable profitability or financial strength.

One of the primary advantages of VOO's portfolio is that all companies are large and well-capitalized, which is what most investors gravitate towards in a downturn. This gives VOO greater fundamental strength than VTI from top to bottom across its portfolio. On the other hand, VTI has approximately 12% of its portfolio in small-medium-sized companies; while this helps with diversification in an up-market, it also creates a headwind for the small and medium-sized companies as they will underperform large-cap companies during a market sell-off.

Final Verdict: Which ETF to Choose in a Market Sell-Off

While both VOO and VTI offer broad exposure to U.S. equities at a low cost, due to their different structures, they are better suited for different types of market conditions. VOO is the preferred investment choice when you want to add to your portfolio during a market sell-off because it invests only in the largest companies in the United States, which provide the relative stability and defensive characteristics necessary for investors who want to protect themselves from a downturn. Historically, there have been periods when VOO has outperformed VTI during these times. Conversely, VTI has broader market exposure and provides a greater opportunity for diversification across all U.S. equities, so it may outperform VOO when small and mid-sized companies are leading the marketplace or when the bulk of performance from the overall market does not come from large technology companies. However, for an investor looking for protection from a market sell-off, VOO's pure exposure to large cap stocks makes it a better choice as a Vanguard ETF investment.