August 28

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SPY vs VTI: What’s the Difference?

Ilir Salihi

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What's the difference between SPY vs VTI? Let’s get the basic definitions out of the way first:

SPY and VTI are both exchange-traded funds, or ETFs. These are index funds with shares that are traded on the stock market.

Both are stock ETFs: They focus on U.S. equities exclusively. And both of these ETFs are very effective at what they are designed to do: Allow investors to gain diversified exposure to a large number of U.S stocks in one transaction, at very low expense ratios.

But there are some differences between these two popular ETFs, both in their investment portfolios and how they are structured. This article will highlight the differences between the two vehicles, and hopefully help the reader decide which is the right fit for their own situation.

SPY vs VTI

Obligatory legal disclaimer before getting started: I am not a Certified Financial Planner or a financial services professional. This article is published for general informational purposes only. Please perform your own due diligence before buying SPY, VTI, or any other investment. Cool?

 Let’s take a look at these two ETFs at a glance:


SPY

VTI

Index

S&P 500

CRSP Total Market Index

Segment

U.S. Large Cap

Large, midcap, and small-cap

Number of Holdings

507

3,935

Expense Ratio

0.0945%

0.03%

Top 10 Holdings

28.09%

23.6%

30-Day SEC Yield

1.19%

1.18%

Large Cap Exposure

84%

72%

Mid Cap Exposure

16%

19%

Small Cap Exposure

0.16%

6.21%

Micro Cap Exposure

0%

2.27%

Buy Shares

Portfolios

Established in 1993, SPY is the oldest ETF on the market. It tracks the S&P 500 index of U.S. large-cap stocks. That means the Index contains the 500 biggest companies with shares traded on the New York Stock Exchange, generally weighted by market capitalization. (Standard & Poor's does not use a pure market cap weighting.

SPY compared to VTI

SPY SPDR S&P 500 ETF Trust -image courtesy of E*trade

They choose 500 companies to represent U.S. large-cap stocks. So there are occasional omissions or rank-order differences in the Index. But the S&P 500 is generally considered an accurate proxy for U.S. large cap stocks.)

VTI, in contrast, tracks the CRSP (Center for Research in Security Prices) Total Market Index. This Index is designed to be representative of all publicly-traded U.S. stocks with meaningful liquidity. That means the ETF’s charter requires it to own shares of nearly everything it can buy on the stock market.

VTI overview snapshot

VTI Vanguard Total Stock Market ETF - image courtesy of E*Trade

Related: Visit E*Trade Today and Buy Shares of VTI or SPY 

Like SPY, VTI is weighted by market capitalization. The more valuable a company is as measured by the value of all its outstanding shares, the more weight it will have in the ETF portfolio.

SPY and VTI have a lot of overlap: The vast majority of VTI's holdings are of the same 500 large-cap companies held in SPY. But VTI's portfolio doesn't stop at large caps. In addition to the large-cap exposure of the S&P 500, the Vanguard Total Market Index also provides meaningful exposure to the midcap, small-cap, and micro-cap segments of the U.S. stock market.

As of the last publicly-released portfolio update (the end of Q2 2021), the VTI portfolio contained 3,935 different stocks – 99.9% of them U.S. stocks.

That’s a much broader exposure than you’ll get from the SPY and its benchmark, the S&P 500.

That’s not a knock against the SPY. Both ETFs do what they are designed to do. 

While SPY, almost by definition, is entirely a play on large-cap and mid-cap U.S. stocks, the Vanguard Total Stock Market ETF also contains exposures to smaller issues. Specifically, as of Q2 2021, VTI includes a 19.13% weighting in mid-cap stocks, a 6.21% weighting in small-cap stocks, and a 2.27% weighting in micro-cap stocks, as of June 30th, 2021, according to Morningstar.

SPY vs VTI - head-to-head comparison of the two ETFs

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If you want exposure to the broadest possible array of U.S. equities in one fund, the VTI is the way to go. If you wanted access to mid-caps, small-caps, and micro-cap U.S. stocks, and you hold the SPYs, you would need to combine your SPY exposure with one or more funds or ETFs specifically focused on mid-sized and smaller companies.

You can also gain exposure to the total market by purchasing SPY as well as a commensurate position in a small-cap ETF, such as the Vanguard Small-Cap ETF (VB) or the SPDR S&P 600 Small-Cap ETF.

Combining a large-cap ETF such as SPY with one or more small-cap ETFs gives investors the opportunity to periodically rebalance their portfolios after periods of small-cap outperformance or underperformance.

Related: How to Invest in Stocks - Beginner's Guide to Get Started

Performance

Generally, small-cap stocks have higher growth rates. In theory, they are also more likely than large-cap stocks to reinvest earnings to grow the company, rather than pay them out to shareholders as dividends. However, as of the end of Q2 2021, the 30-day SEC yields of both of these ETFs are nearly identical, at 1.19% and 1.18%, respectively.

Over the last ten years, both ETFs have delivered an annualized average annual return of just over 15%.

Also, small-cap stocks tend to be more volatile than those of large, established companies. They tend to outperform during bull markets, but take it on the chin during recessions.

This is exactly what we see comparing the returns of SPY and VTI: Because VTI includes exposure to small-cap stocks, it usually generates slightly higher returns in up years, and slightly lower returns in down years.

At present, VTI trades at a slightly lower P/E ratio and P/B book ratio.

Concentration

As would be expected, SPY's position is slightly more concentrated in their top ten holdings, compared to VTI – 28% to 24%. But SPY has no allocation to midcap or small-cap holdings.

SPY shares have a massive average daily trading volume. It’s a favored trading vehicle for both individual and institutional investors alike. About $23 billion in SPY shares gets transacted every day – a much larger volume than VTI shares. The highly liquid nature of SPY shares reduces bid-ask spreads, and trades can usually be executed much faster, reducing the risk of “slippage.”

SPY also attracts a more diverse range of traders, including short-sellers, who provide a source of liquidity for the market. There are also more options available on the SPY than on the VTI, thanks to this intense and diverse mix of daily traders.

If your primary interest in ETFs is short-term trading, SPY may be a better vehicle than VTI for this reason.

Related: Create an Account on E*Trade and Buy SPY or VTI Today

Structure: Pure ETF vs. Unit Investment Trust

While the two ETFs share a lot in common, there's a significant structural difference between the two of them: The Vanguard Total Market ETF is set up as a pure exchange-traded fund. Dividends from the portfolio companies are reinvested in the fund as they come in.

SPY, however, is set up as a unit investment trust. That means the fund does not reinvest dividends back into the portfolio. Instead, it holds dividends in cash until they are distributed to shareholders every quarter.

This gives VTI a long-term edge in bull markets because investors get the benefit of dividend compounding. However, in bear markets, SPY's dividend policy helps soften the blow slightly. However, with yields in both vehicles less than 1.2% in the current environment, this won't make much difference to most investors.

VTI also has another edge: it can and does lend securities to short investors, such as hedge funds, who pay fees to carry the loan. This allows VTI to pick up an extra couple of basis points. As a unit investment trust, this option is not available to SPY.

Related: Robo-Advisor vs Traditional Financial Advisor - Which is Best?

Expense ratio

Vanguard has always marketed itself as a low-cost investment company. Compared to SPY, VTI is no exception, sporting a microscopic 0.03% expense ratio. This makes it one of the cheapest ways to invest in a diversified stock portfolio on the market. It's about a third of the expense ratio charged by State Street Global Advisors for SPY shares, though even their expenses add up to less than one tenth of one percent.

So both SPY and VTI qualify as very low-expense options for equity exposure.

SPY vs VTI - Conclusion

Both of these ETFs are excellent asset allocation vehicles for the equity portion of your portfolio. Both of them provide broad exposure to the fortunes of the U.S. stock market in a single transaction at a very low expense ratio.

SPY may be the better option for active and hyperactive traders. VTI may be the better option for long-term buy-and-hold investors who just want to take advantage of a low-cost passive strategy to gain exposure to U.S. equities.

If you want to accomplish the same thing but have the option to rebalance periodically between large and small caps, you could also use Vanguard's version of the S&P 500 ETF, VOO, for the large-cap portion, and hold VT for the small-cap part of the portfolio.

This way, you'd have a similar exposure to the overall market as VTI (though you can soup up or tone down your exposure to your taste by dialing the VT portion of your portfolio up or down). You would then be able to rebalance as needed, picking up shares of out-of-favor stocks and selling winners. This may be a better strategy to use in retirement accounts because rebalancing and selling winners generates capital gains tax liability.

About the Author

Ilir writes about personal finance, entrepreneurship, and digital marketing. When he's not creating content online, he's spending time with his family in Washington, DC.

Ilir Salihi


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