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.
Having spent more time than I care to admit considering this question, I’ve come to several conclusions:
- The difference between the two approaches is important;
- Which approach is best for a given investor depends on the makeup of their portfolio;
- 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.