VT and VTI are two very popular Vanguard index funds. Here we’ll delve into their differences, similarities, performance, and why you might want one over the other.
In a hurry? These are the highlights:
- VT and VTI are two completely different backgrounds. Both are from Vanguard.
- VT is the entire global stock market. VTI is the only US stock market.
- As such, TV can be considered more diversified than ITV.
- VT has about 8,500 shares, while VTI has about 4,000 shares.
- Historically, VTI has surpassed VT.
- If you use VTI, you should probably use some sort of international diversification.
- VT has an expense ratio of 0.08%, while VTI is 0.03%.
VT vs. VTI: methodology, composition and reasoning
First, understand that while their tickers differ only by the addition of a single letter, VT and VTI are two completely different funds, and one should not be considered a substitute for the other.
Let’s talk about index funds in general for a second. Why would you want to buy? neither of these funds? If you’ve landed here, you’ll probably already know that stocks are an important factor in portfolio profitability and that index funds are a fantastic and economical way to get immediate and wide diversification across all sectors of the stock market. You probably already know that Vanguard has some of the lowest rates and has a solid track record in providing ETFs that accurately track their indexes.
VT is the Vanguard Total World Stock ETF. As its name suggests, it is a weighted stock market capitalization fund that maintains the global stock market. Specifically, VT seeks to track the overall index of all FTSE capitalizations. It contains everyone: all sectors, all styles, all border sizes and all geographies (except border markets). It is the largest index fund out there. If you want to have 100% shares and you don’t want to bother betting on specific countries, size or style limits or anything else, just buy this fund and call it up to date and you can brag about your friends that you have more of 8,500 shares in your portfolio. Come back 30 years later and enjoy your earnings. It’s not much easier.
VTI, on the other hand, is the Vanguard Total Stock Market ETF. I’m not sure why Vanguard doesn’t include “US” in the name, because at first glance one might reasonably think that the name of this fund implies that it is the total global stock market. It is not. This is just the total US stock market. Like VT, it has a weighted market capitalization. Specifically, the fund seeks to track the total US CRSP market index. So let’s talk about all sectors, styles, and caps sizes, but only in the United States. There are no international shares in VTI. Thus, while the fund still holds close to 4,000 shares, it is much more concentrated than VT, as VT has the United States plus the rest of the world. As such, VT can be considered much more diversified than VTI.
You can now see why I said that one of these funds should not be considered a substitute for the other. One is the global stock market. One is just the US stock market. The first includes the second. Specifically, the US (VTI) comprises approximately 55% of the global stock market (VT) at its global weight. So these are very different backgrounds, obviously. What is this comparison of two funds? per se Ignoring it is the fact that an investor who wants to diversify globally and has VTI will almost certainly also pair it with VXUS, the Vanguard Total International Stock ETF. That is, VTI plus VXUS equals VT.
Someone using VTI and VXUS together will probably want to mark their own allocation to US and international stocks, while the investor using VT only accepts the maximum weights of the global market. Specifically, it is likely that most investors who do the first will want to bet on the United States to overweight them with respect to the rest of the world market. For an American investor who does this, this is called bias of the country of origin.
But this comparison is not about VXUS. Back to the topic at hand. Let’s now look at the performance of VT vs. VTI, which is usually the reason people choose one over the other.
VT vs. VTI: historical performance
Here is the global stock market (VT) and the U.S. stock market (VTI) from 1986 to June 2021:
So obviously we should choose VTI, right? Not too fast. In the next section we will talk about why it is not such an easy decision.
VT vs. VTI: reasoning behind global diversification
Again, a decision between these two funds comes down to fully betting on the US (VTI) or achieving global diversification with markets outside the US (VT).
Yes, the US has been the king of the global stock market. That is why its market limit within VT is a whopping 55%, which drastically exceeds all other countries in the global market. Does that mean it will always be that way? Of course not. In this sense, the TV investor is more agnostic towards global markets and the performance of different countries with each other.
It may seem intuitive and sensible to bet entirely on the United States and do 100% VTI. Again, the United States is a power in the global market. Overall, its shares have historically surpassed the broader global market. Why wouldn’t that continue? We bet on the winning horse.
Well, it’s not that simple. Here are some disturbing facts that will hopefully open your eyes to international diversification beyond U.S. borders.
First, realize that stock market returns are not related to economic performance. Yes, you read that right. I will say it again. Economic production is not related to stock market behavior. The historical correlation between GDP and stock market returns has been roughly zero. The economy is not the stock market and the stock market is not the economy.
Famous presidents want to point to a rise in the stock market as an indicator of a good economy. They are wrong. Media experts speculate on the monthly, weekly and even daily movement of the market as a result of economic activity. They are also wrong. The stock market simply illustrates investors ’expectations about the futures of publicly traded companies. Period.
Here are some examples to tell. The US economy was in the toilet in 2020, but the S&P 500 Index, considered a sufficient value for the US stock market, gained a positive 12% during the year. Historically, the South African stock market has outperformed the U.S. stock market. It should seem obvious to you that you should not only invest in South African stocks, even if you live in South Africa. Overall, emerging market equities have historically crushed U.S. equities.
We put some numbers to this idea of global diversification.
Again, at world market limit weights, US equities account for only about half of the world market. International stocks do not move perfectly with US stocks, offering a diversification advantage. This is the main point of diversification in the first place. If U.S. stocks dwindle, international stocks may do well, and vice versa.
No country consistently surpasses all other countries in the world. If done, this overrun would also lead to a relative overvaluation and a subsequent reversal. Meb Faber found that if we look at the last 70 years, the U.S. stock market has outperformed foreign stocks by 1% annually, but all of this overcoming has occurred after 2009.
“But American companies do business abroad,” people exclaim. I’ve always found this argument pretty silly. Excluding stocks outside of the United States means you miss out on leading companies that are elsewhere. Similarly, there have been periods in which a global portfolio has surpassed that of the US portfolio. During the period 1970-2008, an equity portfolio of 80% of US equities and 20% of international equities had a higher overall value. i risk-adjusted returns from a 100% securities portfolio in the US. Specifically, international stocks surpassed the United States in 1986-1988, 1993, 1999, 2002-2007, 2012, and 2017.
Emerging markets and small-cap international stocks have historically crushed the U.S. market, for example, as they are considered riskier and investors are compensated on average for this greater risk. And that just talks about performance. The benefits of volatility and risk reduction are another totally conversation, which is of great importance to a retiree. If I were to write this in 2010 (or 1990 or 1980), we would be talking about how a global portfolio surpassed an American portfolio the previous decade. The important thing to take away is that it is impossible to know when the performance pendulum will swing and how long, let alone how these time periods will coincide with your personal time horizon and withdrawal date.
Dalio and Bridgewater argue that global diversification in equities will become increasingly important given the geopolitical climate, trade and capital dynamics, and differences in monetary policy. They suggest that it is now even less prudent to take a preconceived bet that any country will be the clear winner in terms of stock market profitability.
In short, geographic diversification in equities has enormous upside and little downside potential for investors.
VT vs. VTI: AUM and fees
While both funds are highly liquid and extremely popular, VTI is much more popular with more than $ 250 billion in assets under management. VT has about 1/10 of that amount at $ 23 billion. There are probably a couple of reasons for this. First, VTI was launched much earlier in 2001, while VT was launched in 2008. Second, as I said, many investors use VTI and VXUS for a home country bias. Finally, target date funds do the same and use VTI and VXUS instead of VT.
FP has an expenditure ratio of 0.08%, compared to 0.03% of ITF.
While both are very popular, have low rates, and reliably track their respective indexes, Vanguard’s VT and VTI are two completely different funds. The first is the entire global stock market, while the second is just the U.S. stock market. I am a big fan of geographical diversification. In any case, do not use VTI alone. So the question is: Do you want to be completely practical and use VT to gain the weight of world market capitalization or do you prefer to use VTI in conjunction with VXUS (or your chosen international fund) for some bias in the home country? and rebalance regularly?
What do you think of VT and VTI? Let me know in the comments.
Disclaimer: While I love to immerse myself in investment-related data and play with subsequent testing, I am by no means a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager or accountant. This is not about financial advice, investment or tax advice. The information on this website is for informational and recreational purposes only. The investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not recommended to buy, sell or make transactions on any of the products mentioned. Do your own due diligence. Past performance does not guarantee future performance. Read my disclaimer here.
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