The Schwab S&P 500 Index Fund (SWPPX) and the Blackrock iShares Core S&P Total US Stock Market ETF (ITOT) are two of the largest index mutual funds in existence and easily two of the most popular among individual investors. SWPPX and ITOT form the core of many investor portfolios and many investors compare SWPPX vs ITOT in order to decide which should be the foundation of their portfolio.
A quick reminder that this site does NOT provide investment recommendations. Fund comparisons (such as this one) are not conducted to identify the “best” fund (since that will vary from investor to investor based on investor-specific factors). Rather, these fund comparison posts are designed to identify and distinguish between the fund details that matter versus the ones that don’t.
The Short Answer
There are two main differences between the funds. SWPPX is a mutual fund that holds large-caps and mid-caps, while ITOT is a total market ETF that includes small-caps. However, these are not major differences and investors should look at additional factors when deciding between the two funds.
The Longer Answer
Historical Performance: SWPPX vs ITOT
SWPPX was launched in 1997, while ITOT was launched in 2004. Since their common inception date, the performance difference has only been .1%! This difference has compounded over time and the cumulative performance differential over this time period is just over 8%.
Selecting SWPPX vs ITOT is (at least partially) a bet on whether large-caps or small-caps will outperform in the future (although even a correct prediction will not make much of a difference since performance is pretty similar).
Portfolio Exposures: SWPPX vs ITOT
Both SWPPX and ITOT hold essentially 100% stocks, so I will not dig into country exposures or market classification here. For all intents and purposes, the two funds have identical exposures.
Market Cap Exposure
SWPPX tracks the S&P 500 index and so it mostly holds large-caps with a bit of mid-cap exposure. ITOT tracks the broader CRSP U.S. Total Stock Market Index and so it owns many more mid-caps and small-caps. In other words, SWPPX is a large-cap vehicle and ITOT is a total market vehicle. That being said, due to market cap weighting, both funds are overwhelmingly weighted towards large-caps.
Despite the differences in market cap exposures, the sector exposures between the two funds is nearly identical as shown below.
Factors to Consider
Some investors may point out that the expense ratios between SWPPX and ITOT differ. This is true, but at a certain level, differences in expense ratio do not matter that much. In this case, the ITOT’s expense ratio of .03% is 50% higher than SWPPX’s .02% expense ratio. However, we’re talk about 1 basis points, so even though ITOT is 50% more expensive than SWPPX, it is inconsequential.
ETFs are free to trade at many brokers and custodians, including Schwab. However, many brokers and custodians still charge commissions and/or transaction fees to buy/sell mutual funds. To my knowledge, Schwab does not participate in the pay-to-play arrangements (with their competitor custodians) that would allow their mutual funds to trade for free on many platforms. So if an investor account is at Schwab, it is generally free to trade SWPPX or ITOT. However, only ITOT is free to trade in many non-Schwab accounts.
There is a bid-ask spread when trading ETFs, but this spread is typically less than .01% for ITOT and individual investor trades will not generally be large enough to “move” the market. In the case of ITOT, individual investors should not have a problem trading.
Tax Efficiency & Capital Gain Distributions
ETFs are typically more tax-efficient than mutual funds, due to their ability to avoid realizing capital gains through like-kind redemptions (a process that is beyond the scope of this post). SWPPX is an index fund and relatively tax-efficient. However, it has made capital gains distributions in the past and I would expect this to continue in future. ITOT has never paid out a capital gain distribution, nor do I expect it to in the future. Thus, ITOT is more tax-efficient.
Tax Loss Harvesting
My personal preference is to keep a portfolio entirely mutual funds or entirely ETFs, due to the mechanics of settlement during tax loss harvesting. If an ETF has declined in value and an investor sells it, the trade and cash proceeds will not settle for two business days (T+2). That investor may want to “replace” the sold ETF immediately and attempt to buy another ETF or mutual fund simultaneously. However, mutual funds settle on T+1 basis, so cash for the mutual purchase would be due in one business day (which is one day earlier than the cash from the ETF sale is received). This can obviously cause problems and (even though this issue can be addressed with careful planning) I find it easier to keep accounts invested in similar vehicles. In this case, if a portfolio is all mutual funds, I might lean more towards SWPPX. If all ETFs, I might lean more towards ITOT.
SWPPX does not have a stated minimum for purchases, although some brokerages (especially competitors of Schwab) impose minimums. The minimum purchase size for ITOT is typically one share, although fractional shares are becoming more common. Investors can trade ETFs intraday, as well as in the pre-market and after-hours trading sessions. Investors can only buy/sell mutual funds once per day. This is not necessarily a major factor for long-term investors however.
Final Thoughts on SWPPX vs ITOT
Both SWPPX and ITOT are large, core funds sponsored and managed by respectable asset managers (Schwab and Blackrock iShares, respectively). Although SWPPX is more of a large-cap mutual fund and ITOT is a total market ETF, performance has been extremely similar. ITOT has an edge in tradability and tax-efficiency, but these funds are effectively interchangeable in most other respects.
I would not spend too much energy splitting hairs to decide which one is “better” (unless one has a clear view on whether larger caps or smaller caps will perform better in the future and even then the difference won’t be much)! In my opinion, both funds are among the best out there and investors cannot really go wrong with either.