VSIAX vs VBR

The Vanguard Small-Cap Value Index Fund (Admiral Shares) (symbol VSIAX) and the Vanguard Small-Cap Value ETF (symbol VBR) are two of the largest and most popular small-cap index funds. Some compare VSIAX vs VBR not realizing that they are just two different share classes of the same portfolio.

A quick reminder that this site does NOT provide investment recommendations.

The Short Answer

VSIAX and VBR are different share classes of the same portfolio. The decision to buy one or the other depends on investor-specific factors (some of which are listed below).

The Longer Answer

Vanguard ETFs are structured as share classes of their mutual funds. This is a patented structure that is scheduled to expire in 2023, so we may see this structure more frequently in the near future. In other words, VSIAX and VBR are not two funds pursuing an identical strategy; they are the same fund!

Historical Performance: VSIAX vs VBR

VBR was launched on January 26, 2004, while VSIAX was launched a few years later on September 27, 2011. Since that time, performance has been identical: both funds have returned 12.38% annually! Despite changes in fees and expenses over this time period, there has only been about a 30 basis point difference in cumulative performance since inception! Looking at the chart of VSIAX vs VBR below, it is obvious that they are identical.

Differences Between VSIAX and VBR

Since the two funds are actually two share classes of the same fund, I will skip the usual comparisons here. The geographic exposures, sector weights, market cap coverage so on is identical because the two funds are shares in the same portfolio. There are some resources on the internet indicating otherwise, but these are incorrect.

Factors to Consider

Transaction Costs

ETFs are free to trade at many brokers and custodians, including Vanguard. However, many brokers and custodians still charge commissions and/or transaction fees to buy/sell mutual funds. To my knowledge, Vanguard does not participate in the pay-to-play arrangements that would allow their mutual funds to trade for free on many platforms. So if an investor account is at Vanguard, it is free to trade VSIAX or VBR. However, only VBR is free to trade in non-Vanguard accounts.

There is a bid-ask spread when trading ETFs, but this spread is typically less than .06% for VBR and individual investor trades will not generally be large enough to “move” the market. In the case of VBR, individual investors should not have a problem trading. Interestingly, the bid-ask spread of VBR is more than the annualized performance difference of VSIAX vs VBR.

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). However, since Vanguard ETFs are a share class of their mutual funds, the mutual funds are able to benefit from this feature of the ETF. In other words, VBR is able to extend its tax benefits to VSIAX.

VSIAX paid a capital gain distribution in 2000, but has not made any since then (nor do I expect it to make any in the future due to the existence of VBR). I noticed some posts on the internet saying that VBR is more tax-efficient than VSIAX, but this incorrect as neither fund has ever made a capital gains distribution.

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 VSIAX. If all ETFs, I might lean more towards VBR.

On this topic, investors should probably avoid using these two funds as tax loss harvesting substitutes for one another since they would likely be considered “substantially identical.”

Tradability

VSIAX does have a stated minimum initial purchase of $3,000, so that may be a factor for some investors looking to initiate a position. The minimum purchase size for VBR 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: VSIAX vs VBR

VSIAX and VBR are literally the same. However, investors should consider the above factors when deciding which one is best for them.

Further Reading

Investors who are interested in the Vanguard’s non-value small-cap funds should read our comparison of VVIAX vs VTV.

Posted by Matt

Matt is an investor and investment adviser. He is a CFA charterholder and a CAIA charterholder. His writing on this site is purely educational; he will not make recommendations on this site since he does not know individual readers' situations.