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

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 a Berkshire Hathaway 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 S&P 500 ETF)

  • Type of investment: ETF
  • Expense ratio: 0.03%
  • Minimum investment: n/a
  • Performance over last 5 years: +11.66%

VFINX (Vanguard 500 Index Fund, investor share class)

  • Type of investment: Mutual Fund
  • Expense ratio: 0.14%
  • Minimum investment: closed to new investors
  • Performance over last 5 years: +11.55%

VFIAX (Vanguard 500 Index Fund, admiral share class)

  • Type of investment: Mutual Fund
  • Expense ratio: 0.04%
  • Minimum investment: $3,000
  • Performance over last 5 years: +11.66%

The first difference you will notice is that VOO is an ETF, while VFIAX and VFINX are both index mutual funds. ETFs (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 ETFs, 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 ETFs 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 0.14% (very low by most standards), while VFIAX is less than a third of the expense ratio at 0.04%. 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.

Note: Recently VFINX closed to new investors, and Vanguard dropped the minimum investment amount for VFIAX to $3,000.

VOO, on the other hand, also has the lowest (0.03%) 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.


They overlap each other. 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?

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