Which is Better VTSAX or VTI

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The Vanguard Total Stock Market Index Fund was created in 1992. Vanguard explains it was designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks. The fund’s key attributes are its low costs, broad diversification, and the potential for tax efficiency.

Vanguard’s Total Stock Market Index Fund comes in various share classes, but this post will only discuss the following two share classes because they are more suited to the personal investor.

• Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) with a current expense ratio of 0.04 and a $3,000 minimum investment amount.
• Vanguard Total Stock Market ETF (VTI) with a current expense ratio of 0.03 and no minimum investment amount.

One is a mutual fund and the other is an Exchange Traded Fund (ETF). Charles Schwab concisely outlines the differences between mutual funds and ETFs on a webpage called ETFs vs. Mutual Funds.

White Coat Investor
The White Coat Investor has an excellent article titled VTI vs. VTSAX that outlines the following differences between the two share classes.

• Returns: VTI yields slightly higher returns, likely due to the difference in expense ratios.
• Tax Efficiency: There is nuance, but after some analysis, they show how they are essentially the same.
• Expenses: VTI has a 0.03% expense ratio vs. VTSAX’s 0.04% expense ratio.

Individual Needs
At face value, the ETF VTI appears to be the optimal choice because of the lower expense ratio and higher return. But before you move all of your shares of VTSAX into VTI consider your individual needs and the brokerage platform you are using.

Note the considerations listed below assume that the investments are held at Vanguard in a personal brokerage account and not in a retirement account.

Purchasing Fractional Shares
A fractional share is a unit of less than one full share of equity according to Investopedia. Mutual funds can be purchased in fractional shares or fixed dollar amounts, and ETFs historically had to be purchased in whole share increments. So if you had $500 to invest in VTI and it was trading at $200/share that would mean you could only buy 2 whole shares leaving $100 in your settlement fund.

However, in 2021 the Vanguard brokerage platform began offering ETF purchases in fractional shares. That means your $500 can now purchase 2.5 shares of VTI leaving $0 in your settlement fund.

The Vanguard Investments Department had the following to say about this topic.

• Question: Vanguard’s website says “Vanguard ETFs can be traded in specific dollar amounts.” Does this mean that VTI can be purchased in “fractional shares”?
  • Answer: Yes & no, VTI cannot truly be purchased in fractional shares, but you can now purchase VTI in a dollar amount or in whole share amounts.

In practice, I believe that the purchase of ETFs in specific dollar amounts feels like fractional shares, similar to purchasing mutual funds, with the exception of the automatic investment limitations that I will discuss next.

Automatic Investing
According to Investopedia, an automatic investment plan (AIP) is an investment program that allows investors to contribute money to an investment account at regular intervals to be invested in a pre-set strategy or portfolio. Presently the Vanguard platform for personal brokerage accounts does not allow the purchasing of ETFs within an automatic investing plan.

The Vanguard Investments Department had the following to say about this topic.

• Question: Can Vanguard ETFs like VTI be purchased by automatic scheduled purchases?
  • Answer: No, Vanguard ETFs must be purchased by first transferring funds to the settlement account and then manually purchasing the ETF.

One distinction that should be pointed out is the transfer of the funds from an external account to the Vanguard settlement account can be automated. It is the step of purchasing ETFs that cannot be automated in a Vanguard brokerage account. That extra step has personally caused me to make fewer but larger ETF purchases.

Making fewer but larger purchases has pros and cons in a brokerage account. The negative is the opportunity cost when your money is sitting idle, and not invested as soon as possible. But the positive is that you will have fewer tax lots to manage when you eventually sell the shares.

Tax lots are outside the scope of this post but the Mad Fientist post titled Specific Identification of Shares does a great job covering it.

Vanguard Frequent Trading Policy
If you sell or exchange shares of a Vanguard fund, you will not be permitted to buy or exchange back into the same fund, in the same account, within 30 calendar days. This is part of the Vanguard Frequent Trading Policy. This policy could restrict someone from performing Capital Gains Harvesting by selling an appreciated asset and buying it back to reset the basis.

Note that VTSAX is treated differently than VTI with respect to the Frequent Trading Policy.

The Vanguard Investments Department had the following to say about this topic.

• Question 1: Can I sell VTSAX shares and repurchase them immediately or will I have to wait 30 days, subject to the Vanguard “Frequent-trading policy”?
  • Answer: Yes you would be in violation of the “Frequent-trading policy” and would need to wait 30 days.
• Question 2: Can I sell VTSAX and purchase VTI to not be in violation of the Vanguard “Frequent-trading policy”?
  • Answer: Selling VTSAX and immediately buying VTI is not in violation of the Vanguard “Frequent-trading policy”.

ETF Conversions
Vanguard allows tax-free conversions of some Vanguard mutual funds to the ETF equivalent. Most funds that offer ETF Shares will allow you to convert from conventional shares of the same fund to ETF Shares. Conversions are allowed from both Investor and Admiral™ Shares and are tax-free if you own your mutual fund and ETF Shares through Vanguard. If you have a brokerage account at Vanguard, there’s no charge to convert conventional shares to ETF Shares.

For the complete list of all funds eligible for conversion, see List of Vanguard Funds Eligible for Conversion to ETFs by Vanguard.

The Vanguard Investments Department had the following to say about this topic.

• Question: Can I do an ETF conversion from VTI to VTSAX myself online?
  • Answer: No, the conversion must be over the phone. When you are ready to convert you can choose to convert a percentage of your overall portfolio or just a portion.
  • Answer: Conversion requests prior to stock close will be processed that day and conversions after closing will be the next day. Dividends being paid out during the conversion could delay the transaction. Conversions are irreversible and must be sold to go back to the mutual fund.
  • Answer: Covered shares will maintain their original cost basis when converted. Uncovered shares will take on the average basis. Covered shares are shares purchased after 2011 when Vanguard was required by law to track the basis.

Actionable Takeaways
Here are my personal takeaways from the information noted above and why I believe both VTSAX and VTI can be advantageous to hold in a Vanguard brokerage account at the same time.

• I will make my monthly automatic brokerage investments into VTSAX mutual fund. The intent is to put monthly investments on autopilot and minimize my effort.
• Once a year I will convert most of my VTSAX shares into VTI using the tax-free conversion over the phone with Vanguard to lower the expense ratio from 0.04% to 0.03%. I will leave over $3,000 worth of shares remaining as VTSAX so I do not drop below the minimum investment threshold. In practice, I am leaving around $5,000 or $6,000 as VTSAX to accommodate potential market downturns.
• I will perform Capital Gains Harvesting or Tax Loss Harvesting with VTI shares to expedite the transactions. Capital gain harvesting will be evaluated on a case-by-case basis to determine if I am within the zero capital gains federal bracket and evaluate the state tax implications.

Call to Action
Please don’t stop here. If you hold VTSAX or VTI in a Vanguard brokerage account consider how this information could affect your personal situation. And comment below if you have any of your own comments or questions on these topics.

Links

• ETFs vs. Mutual Funds by Charles Schwab
• Vanguard Frequent Trading Policy by Vanguard
• Investing in Vanguard ETFs is Now Even Simpler by Vanguard
• List of Vanguard Funds Eligible for Conversion to ETFs by Vanguard
• VTI vs. VTSAX by The White Coat Investor
• Specific Identification of Shares by Mad Fientist