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Which ETF should you start with?

14 Aug 2022

Ever heard of VOO, VTI and VWRA? Here's what you need to know about these ETFs to help you get started.

ETF VOO VTI

What you'll learn:

  • Which ETF should you buy to invest in the US stock market?
  • Which ETF should you buy to invest in the global market?
  • Which ETF should you buy for exposure outside of the US?

TL;DR

  • For investors looking to start investing in the US market, two popular ETFs to look at are the Vanguard S&P 500 ETF (VOO) and Vanguard Total Stock Market ETF (VTI). 
  • The VOO tracks the performance of large-cap US stocks, while the VTI offers exposure to close to 100% of the US market. 
  • For investors looking for a diversified portfolio of global stocks, the Vanguard FTSE All World UCITs ETF (VWRA) allows you to also own stocks outside of the US such as in Japan and Europe.
  • Regardless of which ETF you decide to invest in, remember that diversification is the key!

There’re so many ETFs out there in the market. How do I know which ETF I should be buying?

Even for investors looking to take a more hands-off approach, answering this question is key to getting started on ETF investing.

First, we need to decide if we want to invest in the global stock market, or to invest in a particular market such as the US or Singapore. 

Which ETF should I look at if I want to invest in the US stock market?

Several ETFs can help investors to get exposure to the US stock market. We look at two of the more popular ones - Vanguard S&P 500 ETF (VOO) and Vanguard Total Stock Market ETF (VTI). 

The Vanguard S&P 500 ETF (VOO) seeks to track the performance of the S&P 500 Index. 

The Vanguard Total Stock Market ETF (VTI) seeks to track the performance of the CRSP US Total Market Index 

You’ll probably be wondering - aren’t the two the same then?

No, not exactly. 

The S&P 500 Index is made up of 500 leading companies listed in the US and covers approximately 80% of the entire market capitalization of the US. The S&P 500 Index is also considered the best single gauge of large-cap US equities.

On the other hand, the Vanguard Total Stock Market ETF tracks 4,000 listed US companies across mega, large, small and micro capitalisation, and represents close to 100% of the US equity market. 

What difference will this 20% of small and mid-capitalisation companies make to our investments? Probably not much? 

As the S&P 500 index does not include the smaller capitalisation companies, investing in an ETF tracking this index means that you might miss out on some good growth companies which are still considered to have a “small” market capitalisation.

For instance, if you had invested in the VTI ETF back in 2020, you would have directly owned Tesla and captured its staggering 740% returns as part of the ETF returns. 

This was not the case for the VOO ETF, as Tesla was only added to the S&P 500 benchmark in December 2020.

What else should I consider apart from returns? 

Besides returns, you should also note that the fees relating to the two ETFs differ too.

VOO’s expense ratio of 0.0068% is lower than VTI’s expense ratio of 0.0152%. 

While costs are important in the long term especially when compounded over time, both ETFs have expense ratios that are considered low, especially when compared to active ETFs and mutual funds. 

What if I just want exposure to Global Markets?

There are many ETFs that provide exposure to global equity markets too!

The Vanguard FTSE All World UCITs ETF (VWRA) aims to track the FTSE All World Index by investing in large cap and mid cap companies.

The FTSE All World Index is an index that has 4,094 member constituents from developed and emerging markets and covers about 90-95% of the investible market capitalisation

Which countries outside of the US will I get exposure to by investing in the VWRA ETF?

The US is still the single largest country exposure for the VWRA ETF representing 60% of its holding (As of July 2022)

However, you’d also get exposure to markets outside of the US. Its remaining holdings would be in markets such as Japan, United Kingdom, China and Europe. 

If you would like to get exposure to global equities and not just have exposure to the US, then the VWRA might be worth looking at. 

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Description automatically generated
This table shows the percentage of market allocation for the Fund and Benchmark by Country and Region. The final column of the table displays the weight, or percentage difference between the Fund and Benchmark, when applicable. Source: Vanguard as of 31 July 2022

How about ETFs for specific markets?

There are also many regional ETFs for you to explore if you are looking at getting exposure to different markets to diversify your portfolio. 

For example, the iShares MSCI All Country Asia ex Japan ETF (AAXJ) and Vanguard FTSE Europe ETF (VGK) are some examples that you can consider.

Take the next step

You can also read about popular ETFs in Singapore here. 

Remember Beansprout’s Investing Philosophy #3 – Find ways to diversify