Index funds have become increasingly popular among investors in recent years as a cost-effective way to access diversified portfolios. Total market index funds, available through mutual funds and ETFs, allow investors to invest in a selection of stocks that track an index representing the overall U.S. stock market or global markets. This strategy enables investors to benefit from a country’s economic growth without the need to choose individual companies to invest in.
Here’s what you need to know about total market index funds and some options to consider.
Understanding Total Stock Market Index Funds
A total market index fund is a mutual fund or ETF that follows an index representing virtually the entire stock market of a country or region. While many investors are familiar with index funds tracking popular indexes like the S&P 500 or Dow Jones Industrial Average, total market funds encompass companies of all sizes, offering investors the opportunity to earn the overall stock market’s return.
Most total market index funds are weighted based on market capitalization, meaning they have significant exposure to large companies such as Nvidia, Apple, and Microsoft, as well as small-cap companies with potential for growth and higher returns.
Total market index funds typically have low fees, allowing investors to retain a larger portion of their returns. This cost-effective approach to investing, known as index-fund investing, has proven successful for many investors.
Top Total Stock Market ETFs
Bankrate has identified top-performing funds based on the following criteria:
- Funds in ETF.com’s U.S. total market screener
- Top performers over the last five years
- Performance data as of July 19, 2024
Vanguard Total Stock Market ETF (VTI)
This ETF aims to track the CRSP U.S. Total Market Index, investing in companies across different market caps and styles.
- Year-to-date performance: 15.8 percent
- Historical performance (5-year annual): 14.1 percent
- Expense ratio: 0.03 percent
Schwab U.S. Broad Market ETF (SCHB)
This fund seeks to mirror the Dow Jones U.S. Broad Stock Market Index, which includes companies of varying sizes.
- Year-to-date performance: 15.8 percent
- Historical performance (5-year annual): 14.1 percent
- Expense ratio: 0.03 percent
iShares Core S&P Total U.S. Stock Market ETF (ITOT)
This fund tracks the S&P Total Market Index and holds over 2,500 securities.
- Year-to-date performance: 15.7 percent
- Historical performance (5-year annual): 14.1 percent
- Expense ratio: 0.03 percent
SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM)
This fund aims to replicate the total return of the S&P Composite 1500 Index, representing about 90 percent of the U.S. equity market.
- Year-to-date performance: 16.4 percent
- Historical performance (5-year annual): 14.6 percent
- Expense ratio: 0.03 percent
Top Total Stock Market Mutual Funds
Many of the ETFs mentioned above are also available as mutual funds. While mutual funds typically have higher investment minimums and can only be traded once a day, they may offer slightly lower fees compared to ETFs. Here are a couple of total market mutual funds to consider.
Fidelity Total Market Index Fund (FSKAX)
This fund seeks to match the total return of a broad range of U.S. stocks, with about 80 percent of its assets invested in stocks from the Dow Jones U.S. Total Stock Market Index.
- Year-to-date performance: 15.8 percent
- Historical performance (5-year annual): 14.1 percent
- Expense ratio: 0.015 percent
Wilshire 5000 Index Investment Fund (WFIVX)
This fund aims to replicate the total return of the Wilshire 5000 Total Market Index, consisting of approximately 3,500 stocks and weighted by market capitalization.
- Year-to-date performance: 15.2 percent
- Historical performance (5-year annual): 13.7 percent
- Expense ratio: 0.60 percent
* Please note: Mutual fund performance data is as of July 18, 2024
FAQs About Total Stock Market Index Funds
What are the advantages and disadvantages of investing in total market index funds?
There are several benefits and drawbacks to consider when investing in total market index funds. Here are the pros and cons:
Advantages of total market index funds
- Diversification: Provides broad diversification across market caps and styles through a single security.
- Low fees: Typically have very low expense ratios, making them cost-effective investment options.
- Minimal research required: Eliminates the need for extensive research on individual sectors or companies.
- Long-term equity returns: Offers the potential to achieve long-term stock market returns.
- Quick geographic exposure: Allows for rapid addition of geographic diversity to a portfolio.
Disadvantages of total market index funds
- Limited growth potential: Returns are tied to the overall stock market and may not vary significantly across different total market funds.
- Downside of broad diversification: Misses out on potential high returns from specific market segments that outperform.
- Difficulty in staying disciplined: Can be perceived as a boring investment strategy, which may be challenging to stick with during periods of underperformance.
Who should consider investing in total market index funds?
Total market index funds are suitable for both novice and experienced investors seeking broad stock market exposure at a low cost. These funds are easy to manage and can be ideal for long-term investment goals like retirement. It’s important to review the fund’s expense ratio to ensure you’re minimizing fees.
Why are Vanguard total stock market index fund admiral shares popular?
Vanguard’s total stock market index fund admiral shares are popular due to their low cost and broad exposure to the U.S. stock market. Vanguard is known for prioritizing investors’ interests and offers admiral shares with lower fees and investment minimums compared to other share classes. With an expense ratio of just 0.04 percent, investors can access the entire U.S. stock market at a minimal cost.
Conclusion
Total market index funds provide investors with diversified stock portfolios at a low cost. These funds have historically outperformed actively managed funds, primarily due to their cost efficiency. Consider incorporating a total market mutual fund or ETF into your long-term investment strategy.
Editorial Disclaimer: It is recommended that all investors conduct independent research on investment strategies before making decisions. Past performance of investment products does not guarantee future price appreciation.