After recently writing about one of the most popular Vanguard index mutual fund vs. ETF, I received messages from readers asking about some other index funds. Today we’ll review VIMAX vs. VO.
We’ll also explore how VIMAX vs. VO might be a consideration for a portion of your long-term stock portfolio.
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VIMAX vs. VO Overview
The Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX) is a mutual fund that aims to track an index of mid-capitalization US stocks.
Here is a summary from the Vanguard site:
This low-cost index fund provides broad mid-capitalization U.S. equity exposure. The fund seeks to track an index of medium-sized companies, whose stocks tend to be more volatile than those of larger companies. This potential volatility is one of the fund’s key risks. Investors looking to add a passively managed, mid-cap stock allocation to an already diversified portfolio may wish to consider this fund.
Basically, if you own shares VIMAX, you own a small piece of every single one of nearly 350 companies across the mid-capitalization range of the US stock market that is tracked in the index. This creates diversification within that respective section of the stock market.
The Vanguard Mid-Cap ETF (VO) is an exchange-traded fund (ETF) that also aims to track the entire US stock market.
Here is the product summary of VO from the Vanguard site:
- Seeks to track the performance of the CRSP US Mid Cap Index, which measures the investment return of mid-capitalization stocks.
- Provides a convenient way to match the performance of a diversified group of medium-size companies.
- Follows a passively managed, full-replication approach
Despite ETFs being a newer product than mutual funds, Vanguard created VO in January 2004 vs. November 2001 for VIMAX.
Similar to VIMAX, if you own shares of VO, you get exposure to every US company within the mid-cap stock index.
Similarities between VIMAX vs. VO
Here are some of the things that VIMAX and VO have in common.
Portfolio and Holdings
From a stock selection perspective, VIMAX and VO are identical. Both are designed to track the same index of mid-capitalization, or mid-cap, US stocks.
What are mid-cap stocks? As defined on Investopedia:
Mid-cap (or mid-capitalization) is the term that is used to designate companies with a market cap (capitalization)—or market value—between $2 and $10 billion. As the name implies, a mid-cap company falls in the middle between large-cap (or big-cap) and small-cap companies. Classifications, such as large-cap, mid-cap, and small-cap are approximations of a company’s current value; as such, they may change over time.
Returning to VIMAX vs. VO, the top 10 stocks are the same, as are their weighting in the index.
They track the same number of stocks and share the same characteristics.
VIMAX and VO also track the same US stock market sectors of the economy and in the same percentages.
Performance
Performance is nearly identical when reviewing VIMAX vs. VO.
Although both VIMAX and VO have the same identical holdings, VIMAX performed slightly better than VO in terms of overall performance in the 1-year category and practically the same in the 3-, 5-, and 10-year categories.
How is this possible that two identical investments have the same but slightly different performance?
Expenses.
We’ll cover that in further detail coming up.
Differences between VIMAX vs. VO
Despite being similar investment options, here are some of the things that VIMAX and VO don’t have in common.
Liquidity
While not extensively different, both VIMAX and VO are very liquid compared to non-listed securities, such as Real Estate – a long-term, illiquid investment.
As an ETF, VO is slightly more liquid, as you’re able to buy and sell at any price point during open market hours.
If you enter an order to buy or sell VIMAX, comparatively, your order will get processed after market hours at the same price as anyone else who entered a buy or sell order during the day.
This is the case for all mutual funds such as VIMAX.
Share Price
As mutual funds are only pricing at the end of the trading day, VIMAX’s net asset value (NAV), or share price, is struck after the market closes.
Comparatively, since VO is an ETF, the share price changes throughout the day and is priced in real-time.
Minimum Investment and Fees
With VO’s slightly lower expense ratio of 0.04% vs. VIMAX’s 0.05%, VO is slightly cheaper.
As we saw above, this isn’t necessarily a huge difference in cost, but it is a consideration.
Over 10 years for every $10,000 invested, here is how much you would pay in fees:
- VO = $95
- VIMAX = $118
In this regard, VO will save you more money over the longer term – even if both investments are identical and performed exactly the same.
Lower costs make a difference.
As for minimums, you can invest in:
- VO for the price of 1 share
- VIMAX with a minimum of $3,000
While both are relatively accessible investments,
VO requires less capital than VIMAX in order to invest.
What else should you consider before investing in VIMAX vs. VO?
Assuming stocks are a good fit for your long-term portfolio, here are some things to consider.
Account Type & Tax Efficiency
Both VIMAX and VO have low turnover rates. This means the list of securities in the index or benchmarks that they track don’t change frequently because of the need for lower trading. This increases tax efficiency.
If you’re not able to utilize a retirement or other tax-advantaged account, both of these investments will be good candidates to hold in a taxable brokerage account if they meet your investment objectives.
In comparison, assets that might be taxed as ordinary income, such as a bond fund or Real Estate Investment Trusts (REITs) are generally less tax efficient and should ideally be held in a tax-advantaged account.
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Liquidity
Despite purchases and sales of VIMAX being only available at the end of the trading day (vs. VO that can be bought or sold throughout the trading day), there really isn’t much difference here.
Both VIMAX and VO are publicly-traded securities that should generally be accessible if you need to sell and access the cash – depending on your account type.
Obviously, the question of whether or not you should do so is an entirely different matter.
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Risk Tolerance
VIMAX and VO both offer investors exposure to the 500 largest companies in the U.S. stock market.
Compared to individual stocks that come with much higher risks (though also the potential for higher returns), the index approach of VIMAX and VO spans the mid-cap companies of the U.S. stock market from a market capitalization perspective.
Despite this broad diversification, the stock market certainly contains volatility that can swing dramatically in any period of time (whether from hours to years). VIMAX and VO are no exception.
What percentage of your portfolio and how long you should be invested in stocks is also another consideration. Remember – you’d only be getting mid-cap US stock exposure with either VIMAX or VO.
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Other Investment Objectives and Timeline
Related to risk, you need to consider the purpose or objective of your investment dollars. Why are you investing in the stock market? Among other things to consider:
- How long until you need the money?
- Are you able to risk losing your capital?
- Why are you investing this money?
- Is there a specific purchase you intend to make?
You likely shouldn’t be investing your money in VIMAX or VO, or stocks, in general, if you’re intending to use or access the specific funds within the next couple of years.
What happens if there is a massive downturn when you intended to use the money you invested? Utilizing a proper asset allocation and asset type is important.
Both VIMAX and VO should be considered long-term investments.
Regardless of the VIMAX vs. VO discussion,
non-US, or international stocks, are also not captured by either investment.
You’d need to utilize a different mutual fund or ETF for international or non-US stock exposure. Bonds and other asset types are another consideration for your wider portfolio and investment needs.
VIMAX vs. VO summary – which one is better?
With VO’s slightly lower expense ratio of 0.04% vs. VIMAX’s 0.05%, VO appears to be better considering the holdings and other characteristics of the two are practically identical.
As we saw above, this isn’t necessarily a huge difference in cost, but it is a consideration.
I also found I don’t check my portfolio constantly throughout the trading day if I know the price won’t change intraday if I’m invested in a mutual fund.
Overall, both VIMAX and VO provide investors with an inexpensive way to gain diversified exposure to the mid-cap segment of the US stock market.
Either VIMAX or VO can provide a solid foundation for your long-term portfolio – just remember to also address the other segments of the stock market and other asset classes.
Readers, do you own VIMAX or VO in your portfolio? If so, which one? Do you generally prefer ETFs or mutual funds?
Related:
How I Got to Averaging $1,000 a Month in Passive Income
M1 Finance: Why I Transferred My IRA From Vanguard
MoneyMade: Passive Income & Investment Ideas
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