What Is a Total Market Index
Is the S&P 500 all of U.S. stocks? In fact, beneath it lie thousands more small companies not included in the index. A total market index tries to hold all of them.
What Is a Total Market Index
A total market index tries to hold as broadly as possible the listed stocks of a country (or the whole world), including not just large caps but mid, small, and micro caps.
Representative examples are the U.S. CRSP US Total Market Index and Russell 3000, and the world-spanning MSCI ACWI (All Country World Index).
The CRSP US Total Market comprises roughly 4,000 stocks combining large, mid, small, and micro caps. It amounts to holding almost all U.S.-listed stocks in one basket.
How Does It Differ from the S&P 500
The biggest difference is the 'inclusion of small caps.'
The S&P 500, as the name says, holds only about 500 large caps. However, because these large caps make up more than 85% of the total U.S. market cap, the S&P 500 alone represents most of the market.
A total market index adds to this about 3,000 mid- and small-cap stocks that the S&P 500 does not hold. For example, an ETF called VTI, which tracks the CRSP US Total Market, is composed of about 82% large caps, about 12% mid caps, and about 6% small caps.
The number of stocks (about 4,000; for VTI, 3,500–4,000 depending on the tally date) and the 82/12/6 weights are rough recent figures. The specific ETF is only an example for explaining the concept, not a recommendation to buy.
The Meaning and Limits of Broad Diversification
The advantage of a total market index is that 'you don't need to pick stocks.' It holds nearly all companies in the market by market-cap weight, so even if you don't know which company will be the next leader, it gets included automatically.
However, the practical difference may be smaller than you'd think. Because the large-cap weight is as high as 82%, a total market index's moves closely track the S&P 500. Holding more small caps does not make drawdowns disappear either. In a down market where the whole market falls, a total market index falls along with it.
Preguntas frecuentes
Q. Is a total market index always better than the S&P 500?
You cannot say it is always better. In periods when small caps are strong, a total market index gets ahead; in periods led by large caps, it is roughly equal to or lags the S&P 500. Because the large-cap weight is large, the long-term moves of the two closely resemble each other.
Q. Is there a global total market index?
Yes. Indices like the MSCI ACWI or FTSE Global All Cap hold developed- and emerging-market stocks together. However, foreign investing adds the extra variable of currency movement, so the return converted into your home currency can differ from the index's own return.
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