Both VSIAX and VBR have the same investment holdings, since they are just different share classes of the same fund. The primary difference is that one is a traditional mutual fund (VSIAX) and the other is an ETF (VBR).
VSIAX = Vanguard Small-Cap Value index Fund Admiral Shares
VBR = Vanguard Small Cap Value ETF
Here is a chart of VSIAX vs VBR.
| Category | Vanguard Small-Cap Value Index Fund Admiral Shares | Vanguard Small-Cap Value ETF | Comments |
|---|---|---|---|
| Ticker symbol | VSIAX | VBR | |
| Company | Vanguard | Vanguard | Both are Vanguard offerings |
| Structure | Index mutual fund | Exchange-Traded Fund (ETF) | Traditional Mutual Fund vs ETF difference |
| Share class Net asset value | $19.4 billion | $27.0 billion | As of 12/31/23. All classes in the fund = $52.1 billion |
| Index used | CRSP US Small Cap Value Index | CRSP US Small Cap Value Index | Identical |
| Investment weighting | Cap weighted | Cap weighted | Identical |
| # stocks held | 856 | 856 | Holdings as of 12/31/2023 |
| Composition | US Small-Cap Value Equity Market | US Small-Cap Value Equity Market | Small companies of the US stock market (Value segment) |
| Management needed | Passive | Passive | Index driven – active management not needed |
| Investor trading | End of day | Trade during the day like stocks | Investor Preference |
| Initial investment | $3,000 | $1 | ETF has a $1 minimum investment due to fractional shares |
| Fund expense ratio | 0.07% | 0.07% | No difference |
| Capital gain distributions annual tax cost | 0.60% last 10 year average | 0.60% last 10 year average | Per the Prospectus as of 12/31/2022; N/A for retirement accounts |
| Compound annual growth rate for the 10 years ending 12/31/2023 | 8.49% | 8.49% | The return profile is practically identical as the funds have the same holdings |
| Summary | US Small-Cap Value Equity coverage at a low cost | US Small-Cap Value Equity coverage at a low cost |
Investment Similarities
Both VSIAX and VBR have the same holdings since they are part of the same investment fund. The aim of both VSIAX and VBR is to mimic the US Small-Cap Value Equity Market.
This means that both of these investments hold a market capitalization weighted group of US stocks that represent the US Small-Cap value equity market.
Having the same holdings, both have the same Compound Annual Growth Rate (CAGR) over the last 10 years ending December 31, 2023 of 8.49% per year.
The tax cost of holding both of these in a taxable brokerage account due to the annual capital gain distributions is the same at 0.60% per year over the last 10 years ending 12/31/2022 (per the Fund prospectus).
Investment Differences
Dollars Invested
There are more dollars invested in VBR than VSIAX as you can see in the table above. As of December 31, 2023, there was $27.0 billion invested in VBR and $19.4 billion invested in VSIAX. This is not surprising given the increasing popularity of ETFs and additional benefits as described below.
Mutual Fund vs ETF Transactions
One difference between these two investment choices is in the investment structure. VSIAX is a Index Fund, and VBR is an ETF, or Exchange Traded Fund.
As a result, the choice between VSIAX and VBR will be based partially on personal preference of investing via an Index fund or an ETF.
The main difference is that ETFs (Exchange Traded Mutual Funds) trade throughout the day (just like stocks) and Index funds (which are traditional mutual funds), only trade at the closing market price at the end of the trading day.
If you are a long-term investor (not doing intra-day trading), this likely won’t make a big difference to you either way.
Minimum Investment Requirement
For investors just getting started, ETFs often have a much lower investment entry point than a traditional Mutual Fund. This holds true here as well.
The minimum initial investment for VSIAX is $3,000. The ETF minimum for VBR would be the cost of one share (like a stock), and often even lower than that, as many brokers allow for the purchase of fractional shares (less than one share increments).
As of the writing of this article, VBR has a share price of approximately $177 per share, so you can see the ETF investment entry point is much lower. With fractional shares, you could invest in VBR for just one dollar.
Note that for VTSAX, $3,000 is the amount needed to invest initially. Subsequent investments in the fund (once $3,000 is invested) do not have a minimum requirement.
Automatic Investments – another difference
Index Funds have the benefit of allowing you to automatically invest. This is because the fund only exchanges shares at the end of the trading day.
Since this is the case, you can automatically invest a set dollar amount into the fund on a regular interval, just as you would do with a 401(K) via your employer.
When Vanguard, in this case, receives your automatic investment, the money will go into the fund at the next available end of day price.
Since ETFs trade just like stocks throughout the day, you have to enter a trade to buy the security, which requires manual (non-automated) effort.
Low Expense Ratio
One of the reasons for the lower expense ratio of each fund is that these are both passive index investments as opposed to an actively managed investment. A passive investment that follows an index does not require the costs associated with active investment management.
A passively managed fund doesn’t need a fund manager to make strategic decisions of what investments to buy and sell, as the index determines that automatically. The fees are also kept low by Vanguard’s corporate structure, where the investors are the shareholders, which in theory keeps all costs lower as company profits are used to offset costs.
The good news is that Vanguard is well known for lower costs on its investments. Both VSIAX and VBR are no different. The current expense ratio is 0.07% for both. Before investing, be sure to check the latest expense ratios (Vanguard links at the beginning of this article), as they can change over time.
Fees make a big difference in investment returns long term, as described in this Investopedia Article. In this case, however, the fees are so minuscule that the fees will not be an issue with either investment choice.
Watch out for Transaction fees
If you have an account with Vanguard, you should be able to execute transactions to buy or sell either of these without a transaction fee.
If you don’t have a Vanguard account, you should be able to invest in the ETF without a fee, as most brokerages have fee free trading for stocks and ETFs.
However, the index fund VSIAX is a different story. Many firms may charge you a transaction fee to invest in a competing index fund. For example, if you have a Fidelity account, you will likely get charged a fee if you want to invest in the Vanguard index fund, VSIAX. You should consider an alternative index fund or the VBR ETF if you want to avoid the fee.
Tax Efficiency
ETFs typically have the edge on Index Funds when it comes to tax efficiency. This is due to the structural difference in the traditional mutual fund rules vs the ETF rules. This would only be an issue in a taxable brokerage account.
When stocks are bought and sold within the index fund by the fund managers, this often results in net capital gains. Traditional mutual fund rules require that the those net capital gains get passed through to all of the fund investors in the form of capital gain distributions.
Short term net capital gains distributions will show up in Box 1a of form 1099-DIV as “Ordinary Dividends,” and net long term capital gains will show up on form 1099-DIV in box 2a as “Capital Gain Distributions.”
Both of these amounts will need to get picked up on your tax return as additional taxable income.
ETFs also have share transactions similar to index funds, but because they are able to do “in kind” transactions with other major financial institutions to help perform this internal balancing, they are able to avoid many of the capital gains, which is a win for investors. You can read more about this at the Vanguard website.
What does all this mean? Interestingly, Vanguard has a unique way that it has structured it’s internal rebalancing process to keep net capital gain distributions as low as possible, for both traditional mutual funds, like VSIAX, and Exchange Traded funds, such as VBR. This means your tax efficiency should be good for both choices.
Tax efficiency – the numbers
The tax efficiency between these two funds is effectively equal. The taxable return of VSIAX over the 10 years ending 12/31/2022 is 0.6% lower than the pretax return (10.28% – 9.68% = 0.60%) which is the same as VBR (10.28% – 9.68% = 0.60%). This is the average annual tax impact of the capital gain distributions.
What this means is that, on average, your effective return in a retirement account will be 0.60% better than the return on a taxable account, because with the taxable account you will pay taxes every year on the dividend and capital gain distributions mentioned above.
Executive Summary: US Small-Cap value Fund VSIAX vs ETF VBR
- Both investments are low cost options offered by Vanguard
- VSIAX is the index fund and VBR is the ETF version of VSIAX
- Both follow the United States Small-Cap Value Equity Market
- Both are passively managed, which keeps the expense ratio low (currently 0.07% for both choices)
- Both funds have an annualized return of 8.49% for the10 years ended 12/31/2023
- The funds have the same investment holdings
- VBR has a lower initial investment of $1 for brokers that allow fractional shares vs the $3,000 minimum to invest in VSIAX
- As of 12/31/2023, VBR ($27.0 billion) has more dollars invested than VSIAX ($19.4 billion)
- Watch out for transaction fees if you intend to buy the index fund outside of Vanguard
- Both are a solid options for long-term individual investors seeking a low cost diversified portfolio of US Small-cap stocks
Disclaimer: Investing has the risk of loss. Historical performance is not indicative of future results. Be sure to understand all the risks before investing. Read the prospectus. Validate data from multiple sources before making any investment decisions. If you decide to use a financial planner for investment advice, be sure to use a Fee-Only Financial or Investment Advisor that is a Fiduciary, which legally obligates them to do what is in your best interest and not theirs!
