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Total Stock Market Index vs. S&P 500 Index

Sebencapital

Published
17/01/24
Total Stock Market Index vs. S&P 500 Index

Comparing the Total Stock Market Index with the S&P 500 Index is a smart way to pick a high-quality, low-cost foundation for your investment portfolio. While both indices have similar holdings, it's crucial to understand some key factors before making your investment. Figure out which index fund suits your portfolio best.

Total Stock Market Index vs. S&P 500 Index

The main contrast between a total stock market index fund and an S&P 500 index fund is that the S&P 500 covers only large-cap stocks. In contrast, the total stock index includes small, mid, and large-cap stocks. It's essential to note that both indexes represent only U.S. stocks.

Total Stock Market Index Fund Holdings

Funds labeled as "total stock market" index funds usually follow an index containing about 3,000 to 5,000 small, mid, and large-cap U.S. stocks. Examples of total stock indexes are the Wilshire 5000 Index and the Russell 3000 Index. The Vanguard Total Stock Market Index Fund (VTSAX) follows the CRSP U.S. Total Stock Market Index, which includes around 4,136 stocks.

S&P 500 Index Fund Holdings

Unlike total stock market index funds, S&P 500 index funds focus solely on certain stocks listed in the Standard & Poor's 500 index. The S&P 500 includes around 500 stocks from the biggest publicly traded U.S. companies, ranked by their market value.

Tip

Both total stock market indices and the S&P 500 index use a cap-weighted approach. This means that companies with the biggest market value get a higher share of the stocks. For instance, these indices would give more weight to large U.S. companies such as Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Meta (FB), previously known as Facebook.

Total Stock Market Index vs. S&P 500 Index: Performance

Investors might find it interesting that the returns for total stock market index funds and S&P 500 index funds are quite alike. While conventional wisdom suggests that small-cap stocks tend to outperform large-cap stocks over the long term (10 years or more), this idea implies that a total stock market index fund should perform better than an S&P 500 index fund over time.

Let's check out the historical returns of both total stock market and S&P 500 indexes:

Total Stock Market Index vs. S&P 500: Performance Comparison

Vanguard Index Fund (Ticker)1-Yr3-Yr5-Yr10-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 main point from the table is that the historical performance of each fund is quite similar, especially over time. The difference in 10-year returns is only 0.33%. Additionally, the idea that small-cap stocks would lead to higher returns in a total stock market index fund didn't prove true in the last 10 years (the S&P 500 had a higher annualized return).

Tip

When you invest in a total stock market index fund, avoid thinking that you automatically have a completely diverse mix of large-cap, mid-cap, and small-cap stocks all in one fund.


Because these funds are cap-weighted, they have a lot of large-cap stocks, which makes their performance quite similar to an S&P 500 index fund.

A total stock market fund doesn't truly cover the entire stock market; instead, it mostly represents the large-cap stock market with only a bit of mid-cap and small-cap stocks. This is why its average market capitalization is large-cap, explaining why it performs similarly to an S&P 500 index fund.

Bottom Line

Total stock market index funds are just a bit more varied than S&P 500 index funds. Since both types mainly focus on large-cap stocks, the performance of these funds tends to be quite similar. However, investors have the opportunity for better diversification and potentially better performance by choosing their own allocations.

For instance, if investors want a comprehensive view of the U.S. stock market, they might decide to allocate about one-third of their portfolio to three different 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 make sure that stocks align with their risk tolerance and financial goals.

Frequently Asked Questions (FAQs)

1. What percentage of the total U.S. stock market is covered by the S&P 500?

The total value of all the companies in the Wilshire 5000 Total Market Index is around $51.7 trillion. On the other hand, the S&P 500 has a total value of about $38.9 trillion. This means the S&P 500 makes up more than 75% of the entire U.S. stock market in terms of total value.

2. How do you invest in the S&P or total stock market index?

For individual investors, the simplest way to invest in any index is through ETFs (Exchange-Traded Funds) and mutual funds. If you're looking at the S&P 500, a commonly used ETF is called "SPY." For the total market index, a well-known mutual fund is the Vanguard Total Stock Market Index Fund (VTSAX). Vanguard also has a total market ETF with the ticker "VTI." There are various products offering similar exposure for both S&P and total market strategies, so it's a good idea to compare things like expense ratios, liquidity, and taxes before deciding.

3. What is the sector weighting of total market funds like the Vanguard Total Stock Market Fund?

The Vanguard Total Stock Market Index is made up of different sectors, and their weights, from highest to lowest, are: 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%). Keep in mind that these percentages can change, so it's a good idea to check the fund page for the most recent information.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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