Vanguard VTI or iShares ITOT – which is better?
For many years now, I’ve been writing about some of the best low-cost Exchange Traded Funds (ETFs) to invest in the U.S. market with.
I’ve highlighted some of these funds within this post.
A reader recently asked me the following, so I was inspired to write this post about using Vanguard’s VTI fund vs. iShares’ ITOT fund in a portfolio.
I was looking at your ETFs page recently about all those top low-cost ETFs to invest in. I have a question for you. Between VTI or ITOT specifically, do you have a preference? Does it really matter? Both seem great low-cost ETFs to invest in the U.S. market with. Thoughts before I pull the trigger in this market crash? I plan to own this fund for the coming decades in my RRSP to avoid withholding taxes.
Great question and thanks for your readership.
In short, I don’t really have a preference. Both are outstanding long-term choices for U.S. stock market exposure.
When it comes to the tale-of-the-tape both funds are very similar (information current at the time of this post):
|Fund Information||Vanguard VTI||iShares ITOT||General Comments|
|Inception date||May 2001||January 2004||VTI is an older fund.|
|Fund Net Assets||$840+ billion||$20+ billion||VTI is definitely a “granddaddy” of a fund in terms of assets under management.|
|# of holdings||3,551||3,648||Very similar holdings.|
|Top-5 holdings||Microsoft, Apple, Amazon, Alphabet, Facebook||Microsoft, Apple, Amazon, Facebook, Berkshire|
|Biggest sector holding||IT/Technology = 23%||IT = 24%+||Very similar.|
|1-year return to December 2019||30.8%||30.9%|
|Since inception||7.6%||8.9%||VTI is lower return since inception, but also an older fund.|
References Vanguard and iShares sites.
What do I own?
I actually own a bit of XUU at this time.
This way, I avoid any currency conversion headaches.
I believe owning some low-cost Canadian ETFs that invest across the U.S. market, or U.S.-listed ETFs that invest in the U.S. market, is very smart because you and I can ride U.S. equity returns for the coming decades.
Other than my personal hunches on healthcare and technology, I believe in the decades to come both VTI and ITOT will have similar returns.
A reminder about U.S. listed funds
A reminder that iShares Core S&P Total U.S. Stock Market ETF (ITOT) trades in U.S. dollars. When held in a tax-deferred account – such as an RRSP, LIRA, RRIF, or LIF – 15% withholding tax on U.S. dividends and distributions will not apply. So, I tend to have the following asset location rules:
- I keep my TFSA and non-registered account full of Canadian dividend paying stocks for income. I report that growing income monthly.
- I own Canadian dividend paying stocks in my RRSP, but more and more over time, I’m owning more U.S. stocks and U.S. ETFs inside my RRSP for additional diversification.
So, if you’re going to own ITOT or VTI, put that into your RRSP, RRIF or LIRA to avoid withholding taxes.
If you don’t want to own ETFs in U.S. $$ then consider owning iShares Core S&P U.S. Total Market Index ETF (XUU). That fund trades in Canadian dollars. Again, I own some XUU for that very reason at the time of this post.
For Canadian-listed funds like XUU that own U.S. ETFs or U.S. stocks directly, when those funds are held in a registered account the tax drag will be 15% withholding tax. This will add about 0.30% (or so) (15% x 2% ITOT yield = 0.30%) to your cost/tax drag.
If you still want to invest in U.S. listed funds, like ITOT, VTI or other, then you can consider reading up on how to exchange your Canadian dollars to U.S. dollars for less here.
Whether you invest in U.S.-listed VTI, ITOT, SPY, IVV or another low-cost U.S. fund that tracks the U.S. S&P 500 or the U.S. total market, I think you’re picking a winning long-term equity product for your portfolio.
You’re really splitting hairs among the best of the best.
Simply pick one, buy, add, buy more units over time and don’t stop.
I need to practice this myself!
Got a question for me including how I invest? Fire away. I will do my best to write you back, create a post about it, or answer it in any of my future “Weekend Reading” editions.
Thanks for the post. Question – “This will add about 0.30% (or so) (15% x 2% ITOT yield = 0.30%) ” – How so? will it still not be 15% unless you imply 15% will be held on both sides of the border which I think is not the case. I don’t believe ITOT’s yield is a factor here.
Sorry Ram, I could have been more clear. It’s not like the 0.30% is added to your fees or anything but rather 15% of your distributions are withheld – you don’t get them. If ITOT tends to deliver distributions of about 2% for the year (and then capital gains on top of that for your total return) then you’re not going to get 15% of that when you own XUU. Meaning, 0.15 x 2 (yield of ITOT is about 2%) = losing out on 0.30 by owning XUU vs. owning ITOT.
Here is an excellent reference for much more detailed reading.
Thanks Mark. But I still don’t get your math. It is not based on per unit. If I own $2000 worth of XUU and get 2% distribution = $40, then 15% of it will be withheld – i.e. $6. Where does $0.30 come here? If you are calculating on a per dollar basis. it is $0.003 (.3 cents) which is 15% of 2%
We are saying the same thing. 15% withheld. I did remove my “$”, more morning coffee was needed. 🙂 Whether you own 1 unit for 1000 units or other, 15% withholding on distributions occurs with XUU or any CDN-listed ETFs that own U.S. stocks.
Are you looking to buy XUU or ITOT or other?
Hi Mark, how are you doing ? hope you’re staying safe with all the kaos that’s happening these days, I don’t get to work from home as i work for a food distribution company ,but now it feels even more good to go to work knowing that the products we provide is desperately needed.
as for stocks i do hold Vun in my RRSP and i’m planing in the future to switch it to VTI so i can save on the withholding taxes , I also bought 1000 shares in ZDY when the market first dipped i guess i got the FOMO virus 🙂 because i’m down about 3k already on those but hey since everything is down who cares lets have another one too 🙂 i don’t need the money for another 15 years so i simply don’t care much as long we keep collecting those dividends .
lets keep enjoying this roller coaster ride but the only problem is that we don’t know when the ride will end.
all the best to everyone and be safe.
Staying well so far, thanks Gus.
VUN or VTI are great, really a currency conversion + withholding tax issue as I see it as VUN assets grow more with time.
We don’t need our dividend income until our mid-50s at the earliest or even another 15 more years if we want to work until age 60 full-time.
I’m not too worried yet, things will get better.
Health is wealth anyhow.
All the best,
Why do you show ITOT with negative returns in your 1 year and Since inception columns?
1-year return to December 2019 30.8% ~31%
5-year return 11.2% 11.3%
10-year return 13.4% 13.4%
Since inception 7.6% ~9%
That is not a negative sign.
It is the math symbol for approximately.
Exactly but I did update. Thanks Barbara 🙂
I used the “~” symbol to denote an approximation, as Barbara says, but since it might have been confusing I’ve updated the table.
All the best,
Nice comparison of two pretty similar products! I always appreciate these tables which give me the most important information at a glance.
If I may, I’d just add that ITOT gives exposure to about 90% of the U.S. equity market while VTI gives exposure of 100% of the U.S. equity market. I wouldn’t make a decision based on that difference alone, but that’s just me. They both use a sampling method of index replication which is common, as the fund managers will typically hold the core stocks as well as a representative sample of the smaller holdings based on quantitative mathematical models. This is one of the ways they keep their MER so low (Mark, correct me if I’m wrong, but these have to be the smallest MER’s out there!). Trading fees are lower because the ETF doesn’t actually own all stocks in the index, it just samples it.
Mark – was wondering what you think of VFMF? A multifactor active U.S. ETF with less exposure to the technology sector (which to be honest was my main hesitation about the two ETF’s in your post). Still has a low MER but allows for some manager intervention. Do you bother with these alternative ETF types or prefer to just keep it straight forward based on market cap? Thanks!
Good to hear from you…
Yes, not a straight-line comparison in this post but to answer the reader question I figure some comparative information would be good. I like both with the “FANG” focus on U.S. tech I don’t yet have, I now do. I hope to DRIP ITOT in the coming year or two. I figure 300 shares should do the trick at today’s prices. I believe the reason the fund managers can keep MERs so low for these is there is very little active money management; the algorithm does all the work.
I have not heard of VFMF until you mentioned it. I don’t own any factor-based ETFs but like I mentioned on the Twitter machine to you, I know that of this method and I’ve read it offers some merit vs. cap-weighted approach. I will likely continue to invest in a cap-weighted manner for the foreseeable future. Very simple to understand this way and stick to that plan.
Are you considering owing this VFMF?
Thanks for the advice Mark. I am considering it but the performance as of late hasn’t been very impressive, but they are relatively new so maybe they just need time. It’s so hard to figure out which metrics are the important ones so I completely get it why people just go with the tried and true market cap approach.
I’d probably pull the trigger on VFMF or another similar fund but there’s the chance that since the word about fundamental indexing is out in the open, the benefits would be arbitraged out right now which may explain the recent poor performance. I just want an ETF that’s not as broad based as ITOT, VTI or even VOO and that’s a bit more balanced between sectors. I’m a fan of more of a defensive approach with lower volatility so that would include more Consumer Staples and Utilities, as well as Real Estate too. I could always build my own using sector ETF’s but they cost more and I’d like to keep that down if possible.
Thanks again for your advice!
Do you invest in the BMO low-vol fund then? ZLB? I like CDN utilities (like AQN, FTS, EMA, CU and a few others) for my portfolio for that reason. Income and slow growth. I’m not a huge fan of sector ETFs myself since the fees are higher, better off with broader-based, lower cost ETFs if the intention is to hold for many years or decades.
Fees matter as you know 🙂
I don’t but that ETF is certainly closer to the balance I would like. Maybe a bit light on the tech sector but the low volatility is going to automatically keep energy holdings down which have been terrible investments in the last decade or so. As you mentioned, utilities are good investments for income and slow growth. A U.S. equivalent would be something I’d be happy with I think.
I don’t own ETF’s, instead I have my own method for coming up with a portfolio of 30 stocks. It’s done pretty well so far this year, but hasn’t been participating in the mini rally lately so my “outperformance” over the index has shrunk in the last two weeks. My “core” top ten stocks have done well thankfully but my cyclical stocks have gotten absolutely hammered! Hopefully they’ll come back. But the philosophy is similar to ZLB – low volatility equals higher returns in the long run, isn’t going to cause me too much stress that will upset my doctor 🙂
“My “core” top ten stocks have done well thankfully but my cyclical stocks have gotten absolutely hammered! Hopefully they’ll come back.”
They should. Curious on some of your top-10???
I have CDN banks + CDN pipelines + VYM and some JNJ and PG in my top-10 holdings overall. I hope to buy some more U.S. stocks or ETFs like ITOT in the coming months as I try and max out my RRSP again this tax year. I’ve got about $5k left to invest/buy this year, then, that’s it.