Key Points
Major market indexes have been soaring lately, with the S&P 500 (SNPINDEX: ^GSPC), Nasdaq Composite (NASDAQINDEX: ^IXIC), and Dow Jones Industrial Average (DJINDICES: ^DJI) up by 74%, 89%, and 61%, respectively, over the last three years. However, no bull market can last forever, so it’s only a matter of time before the next downturn hits.
The Vanguard S&P 500 ETF (NYSEMKT: VOO) and the Vanguard Total Stock Market ETF (NYSEMKT: VTI) are both strong choices, but there’s one I plan to stock up on to prepare for the next bear market.
One key differentiator to consider
These two ETFs are similar in many ways. They both track the broader market, aiming to capture a large swath of U.S. stocks. However, the Total Stock Market ETF’s diversification could give it an edge during the next downturn.
Both ETFs share the same top 10 holdings, all of which are tech stocks. Most of them — like Apple, Microsoft, Nvidia, and Google parent company Alphabet — are also heavily focused on the development of AI technology.
While the two funds have identical top holdings, those 10 stocks account for nearly 40% of the S&P 500 ETF’s portfolio, compared to around 35% for the Total Stock Market ETF. It’s a subtle difference, but it suggests that the Total Stock Market ETF may be slightly less vulnerable to volatility within the AI space.
VTI Total Return Level data by YCharts
The drawback to a smaller tilt toward tech is that the Total Stock Market ETF may underperform the S&P 500 ETF when the AI industry is booming. As tech stocks have soared in recent years, the S&P 500 has edged slightly ahead — earning total returns of around 311% compared to around 294% for the Total Stock Market ETF.
Where you choose to buy will depend on your risk tolerance and preferences. The two funds are similar in most respects, but as the S&P 500 becomes increasingly dominated by tech, the Vanguard Total Stock Market ETF could offer a slight edge in diversification.
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Katie Brockman has positions in Vanguard S&P 500 ETF and Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
