Total Stock Market Index vs. S&P 500 Index

Compare Holdings and Performance

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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 S&P 500 Index 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 3,500 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.

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 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 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) -1.13 8.01 8.31 11.29
S&P 500 Index (VFIAX) 0.82 9.01 9.09 11.66

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 0.37%. 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 a higher annualized return).

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.