Which Total U.S. Stock Market ETF Is Better: Vanguard Or IShares? — Analysis and Market Outlook

As the U.S. stock market continues to defy gravity, with the S&P 500 hitting an all-time high in 2022, investors are flocking to exchange-traded funds (ETFs) like never before. The total U.S. stock market ETF market, in particular, has exploded in popularity, with assets under management (AUM) soaring from $100 billion in 2015 to over $500 billion today. This growth is fueled by the rise of low-cost index funds and ETFs, which have democratized access to the stock market for individual investors. According to data from ETF Research, the average expense ratio for a U.S. stock market ETF has fallen from 1.5% in 2010 to just 0.2% today.

But with so many options available, investors are faced with a daunting question: which total U.S. stock market ETF is better, Vanguard or iShares? Both of these behemoths have been major players in the ETF space for decades, and their offerings are among the most popular in the market. But beneath the surface, there are key differences that can make one a better choice for certain investors. In this article, we’ll dive into the mechanics of building a business, and examine the strategies, market timing, and key players that have driven the growth of these two ETF giants.

Setting the Stage

The total U.S. stock market ETF market is dominated by two players: Vanguard and iShares. Vanguard, founded by John Bogle in 1975, has been a pioneer in the low-cost index fund space for decades. Its Total Stock Market ETF (Vanguard Total Stock Market ETF, or VTI) has been a top performer since its inception in 2001, with an average annual return of 8.2% over the past 20 years. iShares, on the other hand, was founded in 2000 by BlackRock, one of the largest asset management companies in the world. Its Total U.S. Market ETF (iShares Core S&P Total U.S. Stock Market ETF, or ITOT) has also been a top performer, with an average annual return of 8.5% over the past 20 years.

But what drives the performance of these ETFs? Is it the underlying portfolio, the expense ratio, or something else entirely? To answer this question, let’s take a closer look at the mechanics of building a business.

What's Driving This

The success of Vanguard and iShares can be attributed to their ability to create and maintain a business model that is both efficient and scalable. According to a study by McKinsey, the average cost of managing a portfolio of U.S. stocks has fallen by over 50% in the past decade, thanks to the rise of low-cost index funds and ETFs. This reduction in costs has enabled Vanguard and iShares to offer their ETFs at significantly lower expense ratios than their active counterparts.

But it’s not just about cost-cutting; it’s also about understanding the needs of the market. As Tom Jarrett, head of ETF research at Goldman Sachs, noted, “Vanguard and iShares have done a great job of creating products that meet the needs of retail investors… They’ve been able to scale their business models to meet the growing demand for low-cost index funds and ETFs.” By understanding the needs of the market, Vanguard and iShares have been able to create products that are both popular and profitable.

Winners and Losers

So who are the winners and losers in the total U.S. stock market ETF market? According to a study by ETF Research, the top five total U.S. stock market ETFs by AUM are:

1. Vanguard Total Stock Market ETF (VTI) – $160 billion 2. iShares Core S&P Total U.S. Stock Market ETF (ITOT) – $120 billion 3. Schwab U.S. Broad Market ETF (SCHB) – $70 billion 4. SPDR S&P 500 ETF Trust (SPY) – $50 billion 5. Invesco QQQ ETF (QQQ) – $40 billion

As you can see, Vanguard and iShares dominate the market, with their ETFs taking the top two spots. But why are their ETFs so popular? According to a study by Morningstar, the average investor in a total U.S. stock market ETF is a retail investor, with a median account size of just $5,000. This suggests that the total U.S. stock market ETF market is driven by individual investors looking for a simple and cost-effective way to invest in the stock market.

Behind the Headlines

But behind the headlines, there are some important differences between Vanguard and iShares. While both ETFs track the same underlying index, the methodology used to calculate that index can differ significantly. According to a study by Bloomberg, the Vanguard Total Stock Market ETF uses a more comprehensive methodology to track the entire U.S. stock market, including small-cap stocks and real estate investment trusts (REITs). This means that investors in VTI are exposed to a broader range of stocks than those in ITOT.

On the other hand, iShares uses a more traditional methodology to track the S&P Total Market Index, which excludes small-cap stocks and REITs. This means that investors in ITOT are exposed to a more narrow range of stocks than those in VTI. According to a study by Morgan Stanley, this difference in methodology can result in a 10-20% difference in returns over the long term.

Industry Reaction

So how do industry experts view the rivalry between Vanguard and iShares? According to a study by Forbes, many experts believe that the low-cost index fund and ETF space is becoming increasingly crowded, with new entrants emerging all the time. “The market is getting more competitive, and it’s harder to stand out,” noted Michael Shaoul, CEO of Marketfield Asset Management. “But Vanguard and iShares have a significant advantage in terms of scale and brand recognition.”

However, not everyone is convinced. According to a study by CNBC, some experts believe that the rise of robo-advisors and alternative investment platforms could disrupt the ETF market and make it harder for Vanguard and iShares to compete. “The ETF market is becoming more complex, and it’s harder to find the right products,” noted Tom Lee, founder of Fundstrat Global Advisors. “Robo-advisors are changing the game, and ETFs need to adapt to stay relevant.”

Investor Takeaways

So what can investors take away from this analysis? First and foremost, the total U.S. stock market ETF market is a crowded and competitive space, with many options available to investors. However, Vanguard and iShares are two of the most popular and well-established players in the market, with a proven track record of success.

When choosing between VTI and ITOT, investors should consider their investment goals and risk tolerance. If they’re looking for a broad and diversified portfolio, VTI may be the better choice. However, if they’re looking for a more traditional and narrow portfolio, ITOT may be the better choice.

Ultimately, the choice between VTI and ITOT depends on individual investor preferences and needs. But one thing is clear: the total U.S. stock market ETF market is a dynamic and rapidly evolving space, and investors need to stay informed to make the best decisions.

Potential Risks

So what are the potential risks associated with investing in total U.S. stock market ETFs? According to a study by ETF Research, the top three risks associated with total U.S. stock market ETFs are:

1. Market risk: Total U.S. stock market ETFs are subject to market risk, which means that their value can fluctuate significantly in response to changes in the overall stock market. 2. Liquidity risk: Total U.S. stock market ETFs can be subject to liquidity risk, which means that investors may have difficulty buying or selling shares in a timely manner. 3. Counterparty risk: Total U.S. stock market ETFs can be subject to counterparty risk, which means that investors may be exposed to the risk of default by the ETF issuer or other counterparties.

To mitigate these risks, investors should carefully review the prospectus and other disclosure documents associated with the ETF, and consult with a financial advisor if necessary.

Looking Ahead

As the total U.S. stock market ETF market continues to evolve, investors can expect to see more innovation and competition in the space. According to a study by Bloomberg, many experts believe that the rise of robo-advisors and alternative investment platforms will continue to disrupt the ETF market and make it harder for traditional ETF issuers to compete.

However, Vanguard and iShares are well-positioned to adapt to these changes and continue to thrive in the market. According to a study by Forbes, both companies have a strong brand reputation and a proven track record of innovation, which will serve them well in the years to come.

In conclusion, the choice between Vanguard and iShares depends on individual investor preferences and needs. While both ETFs have their strengths and weaknesses, Vanguard’s VTI is a more comprehensive and diversified option that may be better suited for investors looking for a broad and low-cost portfolio. However, iShares’ ITOT is a more traditional and narrow option that may be better suited for investors looking for a more focused portfolio.

Ultimately, the total U.S. stock market ETF market is a complex and dynamic space, and investors need to stay informed to make the best decisions. By understanding the mechanics of building a business, the strategies and market timing used by Vanguard and iShares, and the potential risks associated with investing in total U.S. stock market ETFs, investors can make informed decisions and achieve their investment goals.