Exploring the Differences Between VTSAX vs VFIAX: Which Vanguard Index Fund is Right for You?

Aleksei Dmitry Melnik June 29, 2023

0 1 3 minutes read

VTSAX vs VFIAX are affordable index funds that are offered by Vanguard . Before delving into their differences let’s explain what an index fund is and why it’s beneficial . An index fund is a type of mutual fund that provides a basket of securities . When you invest in an index fund you are basically investing in all the assets within that basket . Index funds are designed to track the performance of a specific index or part of the stock market . Unlike actively-managed funds index funds remain relatively stable over time .

Let’s mention the key benefits of index funds . First of all index funds offer exposure to a wide range of assets which reduces the risk that is associated with investing in individual stocks . Index funds also have lower expense ratios compared to actively-managed funds which can eat into your investment returns over time . Many actively-managed funds fail to consistently outperform the market . Index funds on the other hand tend to deliver competitive returns over the long term . And finally index funds typically have lower capital gains distributions since they aren’t frequently buying and selling assets .

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VFIAX – Vanguard 500 Index Fund Admiral Shares

VFIAX tracks the performance of the S&P 500 which represents the 500 largest companies in the U .S . equity market . The fund always holds 500 companies but their structure may change over time as companies grow, shrink or go out of business .

VFIAX uses a market capitalization weighting system which means that the value of each company determines its weighting in the fund . Companies with higher market capitalizations have a greater influence on the fund’s performance .

VFIAX includes companies from all market sectors with the most prevalent ones being information technology, healthcare and financials .

VTSAX – Vanguard Total Stock Market Index Fund Admiral Shares

VTSAX tracks the performance of the entire U .S . stock market and provides exposure to small, medium and large-cap value and growth stocks . The fund’s composition changes as new companies go public or existing companies leave the market .

Like VFIAX VTSAX uses a market capitalization weighting system . The weighting of each company corresponds to its share of the market . This fund holds a vast number of stocks which currently stands at 4,026 .

VTSAX encompasses companies from various sectors some of which include information technology, healthcare, industrials and consumer discretionary . Its broader scope offers exposure to a diverse range of stocks .

Choosing the Right Fund for Your Investment Goals

VFIAX is the better fit for investors with moderate to high risk tolerance who are looking for low-cost exposure to the stock market . It can also work well as the sole domestic equity fund in a portfolio . VTSAX is a good choice for long-term investors who prioritize lower risk that is associated with the large-cap equity market . It works best in a diversified portfolio that includes exposure to other equity types for growth .

Although VFIAX consists of the 500 largest publicly traded companies in the U .S . the additional 3,128 stocks in VTSAX have minimal impact on its performance . Changes in the top 10 stocks have a greater influence on VFIAX .

Ultimately both VTSAX and VFIAX are proven market winners . While VFIAX may have slightly lower volatility and returns the difference is minimal . It is up to you to decide which fund lines up better with your investment goals or if a combination of both is the best option .

Both funds can be excellent partners for tax-loss harvesting in a taxable account due to their high correlation with each other and the Vanguard Large Cap Index Fund .