A total stock market index fund is a mutual fund that invests in a basket of stocks that will closely mirror the stock holdings and performance of a particular benchmark, such as The Wilshire 5000 or The Russell 3000. The holdings include most of the domestic US stock holdings traded on stock exchanges, which is why the "total market" name is usually included in the fund name. Like S&P 500 Index Funds, the Wilshire 5000 is market-cap weighted, which means that larger companies (those with larger capitalization) will represent a larger portion (be among the top holdings) by percentage than the smaller companies.
Should You Use a Total Stock Market Index Fund?
Often, the primary purpose of using a Total Stock Market Index Fund is as a core holding in a portfolio of mutual funds (i.e. Core and Satellite Portfolio Strategy).
Many investors use one of the best S&P 500 Index Funds as core holdings because the performance compared to Total Stock Market Index Funds is similar (due to the heavy weighting of large cap stocks in the top holdings). In other words, the top 500 holdings in a Wilshire 5000 index fund or a Russell 3000 index fund will influence the performance of a Total Stock Market Index fund so significantly that an investor could simply use an S&P 500 Index Fund for the same purpose -- as a large-cap core holding -- and achieve similar results.
Also, there will be some mid-cap and small-cap holdings in a Total Stock Market Index Fund so there may be some overlap with other funds in your portfolio. For this reason, many investors prefer using an S&P 500 Index Fund, combined with a separate small-cap index fund, to achieve optimal diversification.
Which Are the Best Total Stock Market Index Funds (and ETFs)?
- Vanguard Total Stock Market Index (VTSMX): Vanguard is the original indexer and VTSMX is among the first index funds to capture the total market. With an expense ratio of 0.18%, VTSMX makes a solid core holding for any mutual fund portfolio.
- Schwab Total Stock Market Index (SWTSX): With an expense ratio of 0.11%, it's tough to beat SWTSX unless you qualify to get lower expense ratios with one of Vanguard's Admiral Shares funds.
- iShares Russell 3000 Index Fund (IWV): This is an Exchange Traded Fund (ETF) that works well for those investors who like to use ETFs because of their ability to trade intra-day like stocks or they are able to trade certain ETFs with no transaction fees (some mutual fund companies charge fees for trading certain index funds). IWV has an expense ratio of 0.20%.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.