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Home » ETFs, Index Funds, Invest

Vanguard has 3 S&P 500 Index Funds. How do you Choose?

Last updated by on 21 Comments

I’m a big fan of passive index investing, where you basically pile all of your investments in to index funds and don’t try to time the market. For the amateur investor, it is hard to beat the performance of this strategy – heck, even the pros rarely consistently beat the indexes over time.

Performance aside, it is the simplest, least stressful way to actually invest your money (and no, digging a hole in your back yard and dumping in stacks of cash or letting it sit in a savings account earning negligible interest are not forms of “investing”).

If you invest in index funds, it is likely that you have an S&P 500 investment in your portfolio (the S&P 500 tracks 500 of the largest companies in the U.S.). And Vanguard’s are the cheapest, making them a preferred option.

Even Warren Buffett, quite possibly the best investor of all time, is a fan of index investing. In his most recent shareholder letter, he had this to say about where he would suggest the trustee of his estate put his money when he died,

“10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund (I suggest Vanguard’s).”

But… wait a minute!

Vanguard (the low cost leader in index funds) actually has three index funds that all invest in the same 500 companies. What is the difference between them? A friend just happened to ask me that question recently,

“Vanguard has three S&P 500 index fund investments: VOO, VFIAX, and VFINX. What is the difference, and which should I buy?”

I don’t give advice on what individual investments to pick, for a number of reasons. However, education is fair game.

Here’s a quick snapshot of each of the funds:

VOO (Vanguard 500 Index Fund ETF)

  • Type of investment: ETF
  • Expense ratio: 0.05%
  • Minimum investment: n/a
  • Performance over last year: +19.94%
  • Performance over last 5 years: +67.76%

VFINX (Vanguard 500 Index Fund, investor share class)

  • Type of investment: Mutual Fund
  • Expense ratio: 0.17%
  • Minimum investment: $3,000
  • Performance over last year: +19.96%
  • Performance over last 5 years: +67.76%

VFIAX (Vanguard 500 Index Fund, admiral share class)

  • Type of investment: Mutual Fund
  • Expense ratio: 0.05%
  • Minimum investment: $10,000
  • Performance over last year: +19.96%
  • Performance over last 5 years: +67.76%

The first difference you will notice is that VOO is an ETF, while VFIAX and VFINX are both index mutual funds. ETF’s (short for exchange traded funds) and mutual funds differ in how they are traded and evaluated. ETF shares are traded (and evaluated) on the stock market throughout the trading day, while mutual fund share purchases/sales are executed after trading has closed for the day. Mutual fund share prices are determined by the net asset value (NAV) of all of the holdings. ETF market prices may be influenced by the NAV of the holdings, but are based on the actual buy/sell trading volume and not the value of the holdings.

This has a real-world impact on your cost. Investment brokers will charge you on the initial purchase or sale of a mutual fund (but not adding additional shares). With ETF’s, you are charged each time you buy or sell shares. This is a key distinction if your investment broker is anyone other than Vanguard (where you can buy/sell ETF’s and mutual funds at no charge).

The next big difference is in the expense ratio – what you actually pay for the management of the funds. You’ll notice VFINX has an expense ratio of 0.17% (very low by most standards), while VFIAX is less than a third of the expense ratio at 0.05%. The reason is that VFIAX shares are considered “Admiral” (a fancy name for preferred) shares. Vanguard has Admiral shares for many of its index funds. They are significantly lower than their otherwise identical counterparts, but they have the stricter requirement of maintaining a minimum total balance in that fund of at least $10,000 for most funds. That’s really the only difference.

VOO, on the other hand, also has the lower 0.05% expense ratio. And there is no minimum investment.

Finally, how about performance? You’ll notice that there is virtually zero difference in performance between the three investments, over time. Below is a chart of the three over the past year. You can see tiny variations between VOO versus VFIAX and VFINX (which are identical). This is due to the difference in evaluation and how they trade. However, VOO trends to the same performance as the other two over time.

vanguard s&p 500 index funds

Performance differences between the three should not impact which you purchase.

If you have enough to qualify for the Admiral shares (VFIAX), they are cheaper than the regular shares (VFINX), making them the clear choice between the two.

If you invest outside of Vanguard at a brokerage that doesn’t have free ETF trading for VOO, then the mutual funds are probably the cheaper route. If you invest with Vanguard’s brokerage, VOO and VFIAX are nearly identical in appeal, if you can meet VFIAX’s minimum.

There you have it.

What S&P 500 index mutual fund or ETF do you invest in, and why?


About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


21 Comments »
  • AdamO says:

    I believe your label is wrong for “Type of Investment” for VFIAX, its a mutual fund, not ETF.

    Good info, was looking at Vanguard funds yesterday.

  • Chris in Boston says:

    Hi G.E.

    Great post. I do have a question… I have access to 30 free equity/ETF trades at my brokerage. MerrillEdge.

    Would the VOO etc option be any different than VFIAX?

    Other than VFIAX’s requirement to have a minimum balance of $10,000. I would think VOO with free trades at any broker would provide a means for folks to buy into this fund with smaller increments and be able to do dollar cost averaging over time.

    What would your thoughts be on that?

  • Anthony says:

    Excellent article again… keep up the great work

  • I’m a huge fan of indexing for the vast majority of investors. I really like several of the vangaurd foriegn stock funds as well.

    VEIEX for emerging and VDVIX for developed. Both are solid, low cost, low risk plays on the foriegn markets.

    VEIEX looks quite nice right now, since so many emerging markets have taken a beating recently. The time to buy is when there is a crisis, not when all is well!

    Long Term Brian

  • Syed says:

    It’s crazy how easy Vanguard makes investing. Once you get by the minimum investment amount, their expense ratios and performance are hard to beat.

  • Scondor says:

    Equal weight index funds generally outperform market cap weighted index funds. RSP has a fairly low expense ratio of 0.4%, which it easily makes up in return. For any duration over a year RSP has outperformed VOO after expenses. This outperformance is logical because with an equal weight fund you are buying the same amount of each company, whereas in a ‘normal’ S&P 500 index fund you are buying more of the faster *grown* companies. This results in 18.1% of your investment being concentrated into the top 10 companies in the portfolio vs 2% for top 10 in an equal weight fund. Put another way: equal weight funds are a better diversification of your resources, and diversification is the point of index investing.

    • curls says:

      Scondor – I’ve looking at equal weighted as a possibly better option so thanks for your comment and refernce to RSP.

      Looking at it against SPY, it’s currently down by about 2%. That’s good since it may very well catch up.

      Seems to me – what’s your thoughts:
      1) Once caught up, it stops “outperforming” the SPY, and just performs equal to it most of the time.

      2) The performance doesn’t make up for the .35% higher fee, and .75% lower div.

      Am I missing something?

  • John Park says:

    Can anyone explain whats the difference between an ETF and lifecycle fund? I’m currently investing in Vanguard’s lifecycle 2050 fund. It has a .18% fee rate. This came highly recommend to me as a very passive form of investing.

    I’m curious to know what an ETF discussed in the article is different from a lifecycle.

    • Steve says:

      Unless you’re referring to something I’ve never heard of, lifecycle funds are target retirement funds made up of other Vanguard funds (international and domestic stocks and bonds, and eventually cash as retirement approaches) that automatically grow more conservative as you near retirement. Most regular Vanguard ETFs aren’t as diverse, just trying to mirror the S&P 500, the international bondmarket, etc. and never rebalance themselves.

  • Aldo @ MDN says:

    I invest in VFINX for my Roth because I just started and don’t have enough to invest in the admiral share class. I also like to contribute monthly so an ETF would not be a good value for me.

    My strategy might change as I come across more money to invest, but for now I’ll keep it where it is.

    The only bad thing is that I don’t have good options on my 401(k) at work. The best I can do is 0.32%, which is not bad, but I’d like it to be better.

  • Chinmay says:

    Hi G.E.,

    I have a Vanguard rollover IRA (401(K) of my previous employer) and I wanted to start investing in S&P 500 Index Funds. I wanted to make monthly contributions to my IRA and invest them directly.

    Keeping this in mind, which one is better in my situation in terms of fees (I do have Vanguard account):
    1. VOO OR
    2. VFINX (Do not have enough money for VFIAX)

    Thanks in advance.

  • Alex says:

    FWIW, having read Bogle’s “Clash of Cultures: Investment vs. Speculation”, the Vanguard founder does not think highly of ETFs. Not that they can’t be used the same as an mutual fund for long term investment, but they are designed around the mindset of speculation / day trading / market timing, and have the incredibly high churn to indicate they are being used this way.

    And, while this doesn’t reflect the Index ETF per se, ETFs in general have sliced up the market into so many commodities that they are clearly meant for people who think they can time the market and choose winners and losers. This is the exact kind of thing Bogle has argued against his whole career and why he “invented” low cost index mutual funds.

    • G.E. Miller says:

      He thinks this even of Vanguard index ETF’s?
      Sure, they can be used that way – just as credit cards can be used to dig yourself in debt. But if you are a responsible investor (or pay your balance in full each month), they can be incredibly advantageous.

  • David says:

    For me the convenience of being able to see up automatic investing in my Roth is worth payijg the extra 0.12%. After all, if I had to do this manually each month I may be less likely to make the contribution at al. I love Vanguard.

  • Kathleen Hensley says:

    According to national averages, I expect to live another 11 years. At 70, females are likely to live to 81. So, should I put some of my social security aside in an EFT or mutual fund to help with living
    expenses that will no doubt increase. Note, I have no other income
    except social security.

  • Josie says:

    I’ve chosen to invest in VTSAX (Vanguard Total Stock Market Index Fund, admiral share class) rather than VFIAX (Vanguard 500 Index Fund, admiral share class) with the goal of increasing diversification. Do you have any thoughts to throw either way at that? Great blog!

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