Total Stock Market Index vs. S&P 500 Index

Compare Holdings and Performance

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Comparing the Total Stock Market Index vs 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, there are some key differences to know before you invest. Find out which stock index fund is best for your portfolio.

Total Stock Market Index vs S&P 500 Index: How They Invest

The primary difference between a total stock market index fund and an S&P 500 index fund is that the S&P 500 Index includes only large-cap stocks, whereas the total stock index includes small-, mid- and large-cap stocks. One similarity between the two indexes is that they both represent only U.S. stocks.

Here's an overview of the types of stocks in each index:

  • 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 US Total Stock Market Index, which includes approximately 3,500 stocks.
  • S&P 500 Index Fund Holdings: Unlike total stock market index funds, S&P 500 index funds can only track one index, which is 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.

Total stock market indices and the S&P 500 index are cap-weighted, which means that the stocks of companies with the largest market capitalization will receive the highest allocation. For example, these indexes will have a higher allocation to the largest U.S. companies like Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Facebook (FB).

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 performance with historic returns of total stock market index and S&P 500:

Total Stock Mkt Index vs S&P 500: Performance Comparison
Vanguard Index Fund (Ticker) 1-Yr 3-Yr 5-Yr 10-Yr
Total Stock Market Index (VTSAX) -1.13 8.01 8.31 11.29
S&P 500 Index (VFIAX) 0.82 9.01 9.09 11.66
Compare performance of total stock market index and S&P 500 index. Returns are through 4/30/2020.

The key takeaways in the table is that the historic performance of each fund is similar, especially as time passes. The 10-year returns are only separated by 0.37%. 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 the higher annualized return).

When investing in a total stock market index fund, don't 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, a large percentage of the holdings are large-cap stocks, making the performance similar to an S&P 500 index fund.

In summary, a total stock market fund does not capture the total stock market; it captures a majority of the large-cap stock market with extremely small representation of other segments, such as mid-cap and small-cap stocks. Therefore it's average market cap is large-cap, which is why it performs similarly to and 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 full 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.

The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.