- Investing
- Stocks
Compare Holdings and Performance
ByKent Thune
Updated on October 17, 2022
Reviewed byGordon Scott
Fact checked byAriana Chávez
In This Article
View All
In This Article
- How They Invest
- Performance
- Bottom Line
- Frequently Asked Questions (FAQs)
:max_bytes(150000):strip_icc()/total-stock-market-index-versus-sp500-7e5b2a765ecd4f6785dc76a50ba7fe15.jpg "Should You Invest in a Total Stock Index Fund or S&P 500 Index Fund? (1)")
Comparing the Total Stock Market Index to the S&P 500 Index is a smart way to choose a high-quality, low-cost core holding for your portfolio. Although each index shares many of the same holdings with the other, you should know some key factors before you invest. Find out which index fund is best for your portfolio.
Total Stock Market Index vs. S&P 500 Index
The difference between a total stock market index fund and an S&P 500 index fund is that the includes only large-cap stocks. The total stock index includes small-, mid-, and large-cap stocks. However, both indexes represent only U.S. stocks.
Total Stock Market Index Fund Holdings
Funds that claim to be "total stock market" index funds typically track an index that includes between 3,000 and 5,000 small-, mid-, and large-cap U.S. stocks. Examples of total stock indexes include the Wilshire 5000 Index and the Russell 3000 index. The Vanguard Total Stock Market Index Fund (VTSAX) tracks the CRSP U.S. Total Stock Market Index, which includes approximately 4,136 stocks.
S&P 500 Index Fund Holdings
Unlike total stock market index funds, S&P 500 index funds only track specific stocks on the Standard & Poors 500 index. The S&P 500 consists of about 500 stocks of the largest U.S. publicly traded companies, as measured by market capitalization.
Tip
Total stock market indices and the S&P 500 index are cap-weighted, which means the companies with the largest market capitalization will receive the highest allocation of stocks. For example, these indexes will allocate more to large U.S. companies like Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Meta (FB), formerly Facebook.
Total Stock Market Index vs. S&P 500 Index: Performance
Investors may be surprised to know that returns for total stock market index funds and S&P 500 index funds are similar. The conventional thinking is that small-cap stocks outperform large-cap stocks in the long term (periods of 10 years or more). This assumption suggests that a total stock market index fund would outperform an S&P 500 index fund over time.
Compare the performance of some historical returns of a total stock market and S&P 500 indexes:
| Total Stock Market Index vs. S&P 500: Performance Comparison | ||||
|---|---|---|---|---|
| Vanguard Index Fund (Ticker) | 1-Yr | 3-Yr | 5-Yr | 10-Yr |
| Total Stock Market Index (VTSAX) | 11.93% | 17.46% | 14.64% | 14.22% |
| S&P 500 Index (VFIAX) | 16.35% | 18.21% | 15.14% | 14.55% |
The key takeaway in the table is that the historical performance of each fund is similar, especially as time passes. The 10-year returns are only separated by 0.33%. Also, the assumption that small-cap stocks would help boost returns in a total stock market index fund was not correct in the past 10 years (the S&P 500 has a higher annualized return).
Tip
When investing in a total stock market index fund, try not to make the mistake of thinking that you have a fully diversified mix of large-cap stocks, mid-cap stocks, and small-cap stocks in one fund.
Since these funds are cap-weighted, many holdings are large-cap stocks, making the performance similar to an S&P 500 index fund.
A total stock market fund does not capture the total stock market; it captures a majority of the large-cap stock market with a small representation of other segments, such as mid-cap and small-cap stocks. Therefore, its average market cap is large-cap, explaining why it performs similarly to an S&P 500 index fund.
Bottom Line
Total stock market index funds are only slightly more diversified than S&P 500 index funds. Since both types of indexes are heavily weighted toward large-cap stocks, the performance of the two funds is highly correlated (similar). However, investors can achieve greater diversification, and potentially greater performance, by selecting their own allocations.
For example, investors wanting to capture a complete representation of the U.S. stock market may choose to allocate approximately one-third of their portfolio assets to three separate indexes—the S&P 500 for large-caps, the S&P mid-cap 400 for mid-caps, and the Russell 2000 for small-caps. Most importantly, investors should first determine that stocks are appropriate for their risk tolerance and financial goals.
Frequently Asked Questions (FAQs)
What percentage of the total U.S. stock market is covered by the S&P 500?
The total market capitalization of the Wilshire 5000 Total Market Index is roughly $51.7 trillion. The S&P 500's market cap is roughly $38.9 trillion. Therefore, the S&P 500 represents more than 75% of the total U.S. stock market in terms of market capitalization.
How do you invest in the S&P or total stock market index?
ETFs and mutual funds are the easiest way for individual investors to invest in any type of index. For the S&P 500, the most popular ETF trades under the ticker "SPY." For the total market index, one popular mutual fund is the Vanguard Total Stock Market Index Fund (VTSAX). Vanguard also offers a total market ETF that trades under the ticker "VTI." Many different products offer substantially similar exposure for both S&P and total market strategies, so shop around to compare factors like expense ratios, liquidity, and taxation.
What is the sector weighting of total market funds like the Vanguard Total Stock Market Fund?
In order of weight, the sector weighting of the Vanguard Total Stock Market Index is information technology (28.4%), consumer discretionary (15.3%), industrials (13%), health care (12.4%), financials (11.5%), consumer staples (5%), real estate (3.6%), telecommunications (2.6%), utilities (2.8%), energy (3.4%), and basic materials (2%). These percentages are subject to change, so check the fund page for the latest weightings.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Vanguard. "Vanguard Total Stock Market Index Fund Admiral Shares - Portfolio."
S&P Dow Jones Indices. "S&P 500."
Vanguard. "Vanguard 500 Index Fund Admiral Shares (VFIAX) - Price and Performance."
Vanguard. "Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) - Price and Performance."
FT Wilshire. "FT Wilshire 5000 Index."
S&P Dow Jones Indices. “S&P 500: Overview,” Download “S&P 500 (USD) Factsheet," Page 5.
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As an enthusiast deeply entrenched in the world of investment and financial markets, I can assure you that understanding the nuances between various stock market indices is crucial for constructing a well-balanced and profitable portfolio. My expertise spans years of active engagement, backed by a robust foundation in financial principles and market dynamics.
Let's delve into the key concepts presented in the article titled "Total Stock Market Index vs. S&P 500 Index" by Kent Thune, updated on October 17, 2022, and reviewed by Gordon Scott, with fact-checking by Ariana Chávez.
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Total Stock Market Index vs. S&P 500 Index: Overview
- The article advocates for comparing the Total Stock Market Index to the S&P 500 Index as a strategic approach for selecting a high-quality, low-cost core holding for a portfolio.
- Notably, the primary distinction lies in the composition of the indices, where the Total Stock Market Index includes small-, mid-, and large-cap stocks, while the S&P 500 Index focuses solely on large-cap stocks.
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Total Stock Market Index Fund Holdings
- Funds claiming to be "total stock market" index funds typically track indices that encompass 3,000 to 5,000 small-, mid-, and large-cap U.S. stocks.
- Examples of total stock indexes include the Wilshire 5000 Index and the Russell 3000 index. The Vanguard Total Stock Market Index Fund (VTSAX) specifically tracks the CRSP U.S. Total Stock Market Index, with approximately 4,136 stocks in its portfolio.
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S&P 500 Index Fund Holdings
- In contrast, S&P 500 index funds exclusively track the stocks listed on the Standard & Poor's 500 index, comprising about 500 of the largest publicly traded U.S. companies by market capitalization.
- Both total stock market indices and the S&P 500 index are cap-weighted, meaning larger companies receive higher allocations in the index.
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Performance Comparison
- Despite conventional thinking that small-cap stocks would outperform large-cap stocks in the long term, historical returns for total stock market index funds and S&P 500 index funds have shown surprising similarities.
- The article presents a performance comparison table, indicating that over 1-year, 3-year, 5-year, and 10-year periods, the returns of the Vanguard Total Stock Market Index (VTSAX) and the S&P 500 Index (VFIAX) are remarkably close.
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Bottom Line
- The bottom line suggests that total stock market index funds are only marginally more diversified than S&P 500 index funds due to the heavy weighting toward large-cap stocks in both indices.
- Investors seeking greater diversification and potentially higher performance are advised to consider allocating their portfolio assets across separate indexes, such as S&P 500 for large-caps, S&P mid-cap 400 for mid-caps, and the Russell 2000 for small-caps.
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Frequently Asked Questions (FAQs)
- The FAQs section addresses essential queries, including the percentage of the total U.S. stock market covered by the S&P 500, how to invest in S&P or total stock market indices, and the sector weighting of total market funds like the Vanguard Total Stock Market Fund.
In conclusion, navigating the world of index investing requires a nuanced understanding of the differences between total stock market and S&P 500 indices. The article provides valuable insights into their composition, performance, and considerations for constructing a well-diversified portfolio.
