Total US Stock Market Vs. The S&P 500 Index – An Investor's Guide – Forbes

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My asset allocation includes a healthy dose of large U.S. companies. I’m sure most portfolios do as well. The question that often arises for index fund investors is whether to use a total U.S. stock market fund or an S&P 500 index fund.

In my current portfolio, I have the Vanguard S&P 500 Index Fund (VFIAX). Recently, I’ve started to wonder if I would be better served by Vanguard’s total U.S. market index fund (VTSAX).

A monitor displays Exxon Mobil Corp. signage on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Tuesday, May 30, 2017. U.S. stocks halted a seven-day advance, while the dollar fluctuated as data showing a rebound in consumer spending offset a wider selloff in commodities. The euro slipped with equities in the region. Photographer: Michael Nagle/Bloomberg

Having spent more time than I care to admit considering this question, I’ve come to several conclusions:

  1. The difference between the two approaches is important;

  2. Which approach is best for a given investor depends on the makeup of their portfolio;
  3. For me, I’ll be sticking with the S&P 500 index.

Total Market Vs. S&P 500

Let’s first examine the differences between these two approaches. I’ll be using the Vanguard funds noted above for my comparison, although many fund companies offer comparable funds and ETFs.

The popular S&P 500 index includes 500 of the largest U.S. public companies. Many of these companies are household names, such as Apple, GM, and Amazon. Others you may have never heard of, such as Teradata Corporation and Murphy Oil Corporation. The average value of a company in the index is over $86 billion.

That’s not to say that the S&P 500 doesn’t include some relatively smaller companies. According to Morningstar, 13% of the fund is invested in mid-cap companies.

The S&P 500 index is considered a “blend” fund. It’s a combination of companies that are either growth or value. Ford would be an example of a value company, Amazon a growth company.

In contrast, a total U.S. stock market fund captures all of the publicly traded companies, big and small. It invests 18% in mid-cap companies and 9% in small-cap, according to Morningstar. Its average company valuation is about $49 billion, a significant decrease from the $86 billion of the S&P 500. It’s also a blend fund.