VTSAX vs. S&P 500: Which Index Fund Is Better for Long‑Term Investing?

VTSAX vs. S&P 500: Which Index Fund Is Better for Long-Term Investing?

If you’re just learning how to start investing, you’ve probably seen terms like “S&P 500” and “VTSAX” thrown around. It can feel like a secret code, especially when you just want to make a smart choice for your money. The fear of picking the “wrong” option can be paralyzing, leaving you stuck on the sidelines.

At their core, both are types of “index funds,” which is a straightforward way to invest. Think of an index fund like a pre-packaged basket of investments. Instead of trying to pick hundreds of individual stocks yourself, you buy one fund that holds all of them for you, instantly spreading your money across the market.

This guide decodes exactly what each of these popular “baskets” is and what their key differences mean for you. The goal is to give you the clarity and confidence to pick one, get started, and feel good about your decision.

First, What Is an Index Fund? (Think of a Pre-Filled Shopping Cart)

Before diving into fancy acronyms, let’s start with a basic idea. When you buy a stock, you’re buying a tiny piece of a single company, like Target or Ford. Trying to pick the one company that will do best is incredibly difficult and risky; if that company struggles, your investment does, too.

This is where an index fund comes in. Think of it as a pre-filled shopping cart. Instead of having to walk through the entire store picking out individual items (stocks), you can buy the whole cart in one single purchase. This one investment might hold tiny pieces of hundreds, or even thousands, of different companies all at once.

The huge advantage of this is a powerful concept called diversification. It’s the investing version of “not putting all your eggs in one basket.” Because your money is spread out so widely, the poor performance of a few companies has very little impact on your overall investment. This simple strategy is the foundation of modern, low-stress investing.

What Is the S&P 500? Meet America’s 500 Biggest Companies

You’ve likely heard its name on the news: the S&P 500. The S&P 500 isn’t something you can buy directly; it’s simply a list—an index—of the 500 largest public companies in the U.S. Think of it as a barometer for the health of the American economy. When reporters say “the market went up,” they are usually referring to the performance of this group of companies.

An S&P 500 index fund is the shopping cart that buys and holds a piece of all 500 companies on that list for you. This means your single investment gives you ownership in household names like Apple, Microsoft, Amazon, and Johnson & Johnson. Because you’re investing in these established giants, an S&P 500 fund is often seen as a reliable foundation for building long-term wealth.

What Is VTSAX? Owning a Piece of the ENTIRE U.S. Stock Market

If an S&P 500 fund is your ticket to owning America’s 500 biggest companies, another option exists for those who want to own a piece of everything. This is where VTSAX comes in. VTSAX is the fund symbol for Vanguard’s Total Stock Market Index Fund, and its mission is to buy and hold a slice of nearly every publicly traded company in the United States, all in one package.

While an S&P 500 fund holds around 500 stocks, VTSAX holds more than 3,500. VTSAX automatically includes all 500 companies from the S&P 500, but then it adds thousands of medium-sized and smaller businesses on top of that. You still get the established giants like Apple and Google, plus the next generation of potential success stories.

With one purchase, you own a piece of the entire U.S. market, making VTSAX a very popular core holding for long-term investors. You aren’t just betting on the big players; you’re betting on the whole American economy.

The Key Difference: More Companies Mean More Diversification

The primary advantage of owning thousands of extra companies boils down to one key idea: diversification. Think of it like betting on a sports league. An S&P 500 fund is like putting your money on all the championship-winning teams from the past decade—the proven, established giants. VTSAX is like putting your money on every single team in the league, both the big champions and the smaller, up-and-coming underdogs.

This broader approach gives you exposure to thousands of smaller and medium-sized companies that aren’t big enough to make it into the S&P 500. While these companies are less established, they also include the potential breakout stars of tomorrow. Owning them gives you a stake in a wider range of the American economy, not just the top tier. For many investors, this “own it all” strategy feels safer and more complete.

However, because the 500 companies in the S&P 500 are so massive, they make up about 85% of the total value of VTSAX. This means that even though VTSAX holds thousands more stocks, its performance is still overwhelmingly driven by the same big companies in an S&P 500 fund. Their paths aren’t identical, but they walk very closely together.

Performance Face-Off: Does More Diversification Mean Better Returns?

Given that VTSAX holds thousands more companies, you might expect its performance to look dramatically different. But when you plot their growth on a chart over the last ten or twenty years, a surprising picture emerges: the two lines are nearly indistinguishable, moving up and down in almost perfect sync.

This goes back to the sheer size of the companies in the S&P 500. Think of the S&P 500 as a massive cruise ship. VTSAX is that same cruise ship with thousands of small sailboats tied to it. While the sailboats are there, they simply don’t have enough power to change the direction or speed of the giant ship. When the S&P 500 has a good year, both funds have a good year.

This is great news for your decision-making. It means you don’t need to stress about picking the “winner” based on performance. In some years the S&P 500 might be slightly ahead, and in others, the total market might edge it out, but over the long run, their paths are remarkably similar. The choice is about the investment philosophy that makes the most sense to you.

The Only Cost You Need to Know: A Simple Guide to Expense Ratios

All investment funds charge a tiny annual fee for managing your money, called an “expense ratio.” It’s a small percentage taken out of your investment each year to cover operating costs, and keeping this number low is critical for long-term success.

This is where both options truly excel. The expense ratio for VTSAX is a minuscule 0.04%. A comparable S&P 500 fund, like VOO, is often even lower at 0.03%. To put that in perspective, a 0.04% fee means you pay just 40 cents per year for every $1,000 you invest. These incredibly low-cost index funds are a primary reason they are so widely recommended.

The difference between paying 40 cents versus 30 cents on every $1,000 is so small it’s unlikely to impact your financial future in any meaningful way. Both are considered exceptionally low-cost, so your decision doesn’t hinge on complex math.

How to Choose: A Simple Framework for Your First Investment

With performance and costs being nearly identical, the choice between these two excellent options comes down to preference. Think of it as choosing between two top-rated, very similar cars. There is no wrong answer, only the one that makes you feel most comfortable for the long journey ahead. You really can’t make a bad choice.

Here’s a simple way to decide:

• Choose VTSAX (or a total market fund) if: You want the ultimate simplicity of owning the entire U.S. market in one fund. You believe that by owning everything, you’re guaranteed to capture the growth of the whole economy.
• Choose an S&P 500 fund if: You prefer to stick with only the largest, most established U.S. companies. You feel more confident betting on the proven track record of these household names.

Successful investors agree that obsessing over this specific choice is a classic case of missing the forest for the trees.

Don’t Overthink It: Why Starting Is More Important Than This Choice

Just a few minutes ago, ‘VTSAX’ and ‘S&P 500’ might have felt like a secret code. Now you understand they are simply two different, highly effective ways to own a piece of the U.S. stock market.

The biggest beginner investing mistake isn’t picking the ‘wrong’ of these two funds—it’s getting stuck and not starting at all. Both are excellent, low-cost paths for long-term investing. The difference between them is tiny compared to the massive benefit of simply putting your money to work.

Your next step is simple: Open an account with a trusted investment company, choose either fund, and begin. You have the knowledge you need. You’ve got this.