Total Stock Market Index

Quick definition: A total stock market index captures the entire U.S. equity market by including large-cap, mid-cap, and small-cap stocks, providing comprehensive exposure to approximately 3,500+ securities and representing 100% of investable U.S. equity markets beyond the S&P 500's 80% coverage.

Key Takeaways

• Total market indices extend beyond the S&P 500 by including mid-cap and small-cap stocks, capturing the complete investable U.S. equity universe.
• While total market indices include thousands of stocks, the S&P 500 still dominates performance due to market-cap weighting favoring larger companies.
• The additional stocks beyond the S&P 500 contribute meaningful diversification and capture companies in growth phases before they reach mega-cap status.
• Total market indices add minimal performance drag relative to the S&P 500 but provide broader diversification benefits.
• For buy-and-hold investors seeking maximum market exposure with minimal decision-making, total market indices offer compelling simplicity.

Beyond the S&P 500: The Complete Picture

The S&P 500 represents approximately 80% of the total U.S. stock market's capitalization, which leaves an important question: what about the other 20%? These are mid-cap and small-cap stocks—companies that have grown beyond startup stage but haven't yet reached the scale of S&P 500 constituents. They're real companies with real earnings, real products, and real customer bases. Many are household names, while others operate quietly in specialized industries.

These smaller companies represent genuine investment opportunities. Many will eventually grow large enough to join the S&P 500. Some will become mega-cap leaders. Others will remain mid-cap or small-cap throughout their corporate lives, serving important functions in the economy without ever reaching giant-company status.

A total stock market index captures this complete picture by including the entire investable universe of U.S. stocks. Where the S&P 500 draws a line at 500 companies, a total market index includes thousands of securities. The exact number varies—the Wilshire 5000 literally aimed for 5,000 stocks when created, though it contains fewer today due to market consolidation. The total market index created by Vanguard includes approximately 3,500 stocks.

Composition and Selection Methodology

Total market indices typically employ straightforward selection criteria. Rather than applying complex screens and committee judgments as the S&P 500 does, most total market indices simply include all stocks meeting basic requirements: publicly traded on a major U.S. exchange, meeting minimum liquidity and size thresholds, and maintaining proper financial reporting.

The Vanguard Total Stock Market Index, one of the most widely tracked, includes essentially all publicly traded U.S. stocks meeting these minimal requirements. This approach is intellectually honest—there's no subjective judgment about which companies "deserve" to be in a total market index. If it's publicly traded and meets basic standards, it's included.

This comprehensive approach means a total market index inevitably includes a wider range of companies than the S&P 500. You'll find established industrial companies, financial services providers, healthcare organizations, retail businesses, small industrial manufacturers, regional banks, and thousands of other business types. Some are profitable, others are less so. Some grow rapidly, others mature slowly. The index includes them all.

Market-Cap Weighting: The Dominance of Mega-Cap

Despite including thousands of stocks, a total market index's performance is dominated by its largest constituents due to market-cap weighting. The top 10 holdings in a total market index exert nearly the same influence as the top 10 in the S&P 500, simply because these companies' market capitalizations dwarf everything else.

This characteristic surprises many investors. They assume that including 3,500 stocks instead of 500 fundamentally changes the index's character. In reality, the dominance of market-cap weighting means the total market index's performance closely tracks the S&P 500's performance. The correlation between the two is extraordinary—typically exceeding 99%.

This doesn't mean the total market index is identical to the S&P 500. The additional holdings, while smaller individually, collectively contribute meaningfully to overall returns. But the contribution comes from thousands of small-weight holdings rather than from a few large ones. An investor comparing S&P 500 and total market index performance will see them move almost in lockstep, with total market index sometimes slightly leading and sometimes slightly lagging, but rarely diverging materially.

Capturing Small-Cap Premium Potential

Despite tracking closely with the S&P 500 overall, total market indices do provide exposure to the small-cap premium—the historical tendency of smaller stocks to outperform larger ones over extended periods. Academic research documents this small-cap premium consistently across decades and geographies. Smaller companies offer higher growth potential and higher risk, and the markets appear to compensate investors for taking this risk.

However, the small-cap premium is inconsistent. In some decades, small-cap stocks dramatically outperform large-caps. In others, large-caps dominate. The premium appears strongest in early decades of long measurement periods and weakest recently, though research disputes whether this reflects genuine changes in market structure or simply cyclical variation.

By including small-cap and mid-cap stocks, a total market index captures this premium, if and when it appears. An investor using a total market index automatically participates in small-cap outperformance during periods when it occurs. This is in contrast to an S&P 500 investor who must separately decide whether to overweight small-caps beyond their natural market-cap weighting.

Diversification Benefits Beyond the S&P 500

While the 20% of the market not in the S&P 500 doesn't dramatically change returns, it does provide meaningful diversification. This 20% includes industry representation and company characteristics that differ somewhat from the S&P 500's composition. Small-cap companies tend to be more concentrated in certain industries and more focused on domestic economy exposure, while large-caps include more multinationals.

This diversification comes almost for free—the cost of tracking a total market index is nearly identical to the cost of tracking the S&P 500. An index fund provider can implement a total market index with minimal added expense. The fund simply holds more positions, but the trading cost per position is negligible.

For investors who want to simplify their portfolio while maintaining maximum diversification, a total market index fund offers a compelling solution. A single fund provides exposure to thousands of companies across all market capitalizations and sectors. This comprehensive approach removes the need to make decisions about which segments to emphasize or which size premiums to exploit.

Practical Implementation and Index Funds

Multiple investment providers offer total market index funds. Vanguard's Total Stock Market Index (VTSAX or VTI) is the largest and most widely used. Similar offerings exist from other providers, including funds based on the Wilshire 5000 or other total market methodologies. All aim at comprehensive U.S. equity market exposure.

The practical differences between total market index funds are minimal. All track their underlying index closely, with tracking error typically under 0.05% annually. The funds' returns converge within these tiny margins. An investor choosing between total market index funds should focus on minimizing costs, as the differences in performance are negligible.

Total market index funds are particularly suited to several investor profiles. Buy-and-hold investors can purchase a single fund and maintain a buy-and-hold stance for decades, never needing to adjust allocations or make market timing decisions. Investors beginning their investment journey can start with total market exposure and gradually add international diversification as their portfolio grows. Investors seeking maximum simplicity can own a single total market fund as their entire equity allocation.

Total Market vs. S&P 500: Which Is Better?

This question lacks a universal answer; it depends on your objectives and preferences. The S&P 500 is simpler conceptually—500 clearly defined companies representing 80% of the market. It's the performance benchmark against which institutional managers are judged. It's well understood and extensively researched.

A total market index is more comprehensive. It includes every company you might own if you bought the entire market. It eliminates any debate about which mid-cap or small-cap stocks you're missing. It provides cleaner separation of concerns—you own the entire U.S. equity market with one holding, and any decision to emphasize specific size premiums or sectors becomes a separate overlay decision rather than something to second-guess within your index.

Historical performance differs only marginally. Over the past 20 years, the total market index typically outperforms the S&P 500 by 0.1-0.2% annually, roughly reflecting the small-cap premium's contribution. This difference is tiny relative to the overall market return but meaningful when considering decades of compounding.

For most investors, either choice is substantially better than the alternative of trying to outperform the market through active management. Whether you choose S&P 500 or total market, you'll likely achieve superior long-term results compared to pursuing an active strategy. The difference between the two is secondary to the decision to use indices at all.

Total Market Indices in Context

Total market indices typically form the core equity holding in passive portfolios. Beyond total market domestic equity, many investors add international index exposure through indices like MSCI EAFE or MSCI Emerging Markets. Some investors might use market-cap weighting strategies to understand how their allocation is structured, or they might explore sector-specific indices to understand their sector exposures.

The simplicity and comprehensiveness of total market indices make them an ideal foundation for passive portfolios. Whether used alone or combined with other index holdings, a total market index provides broad, low-cost exposure to the entire investable U.S. equity market.

Decision tree

Next

While total market indices provide complete domestic coverage, many investors recognize the importance of international diversification. In the next article, we'll explore international indices like MSCI, which extend your investment universe beyond the U.S. to capture opportunities in developed and emerging markets worldwide.