Total stock market vs. the S&P 500: does it matter?

Two of the most popular index funds on earth are the S&P 500 fund and the total US stock market fund. New investors often agonize over which to buy, imagining a big decision. The honest answer: they are roughly 85% identical, both are excellent, and the difference between them will almost certainly be a rounding error over your lifetime. But the small differences are worth understanding.

What each one holds

An S&P 500 fund holds about 500 of the largest US companies. A total stock market fund (such as VTI or FSKAX) holds essentially every investable US company - roughly 3,500 to 4,000 of them, adding the mid-cap, small-cap, and micro-cap companies the S&P 500 leaves out. Because both are market-cap weighted, the giant companies dominate each fund equally, which is why they overlap so heavily despite the total market holding seven times as many stocks.

Why the difference is so small

Because both funds weight companies by market value, the small companies the total market adds make up only about 10-15% of the fund - and each individual small-cap is a tiny sliver. So even in years when small-caps behave very differently from large-caps, they can only nudge the total market fund a little away from the S&P 500. Over long periods the two funds' returns have tracked within a fraction of a percent of each other.

So which should you buy?

• If your plan is a total-market fund, buy it and never think about this again - it's the most complete single US holding.
• If your 401(k) only offers an S&P 500 fund (very common), use it happily; you're capturing ~80% of the US market at rock-bottom cost.
• Don't own both - they overlap so heavily that holding both is just a slightly diluted total market fund with extra clutter.
• Whichever you pick, pair it with an international fund if you want global diversification; neither of these holds any foreign stocks.

The bottom line

The total US stock market fund and the S&P 500 fund are close cousins: same giant companies, same tiny fees, nearly identical returns, with the total market adding a slice of smaller companies for slightly broader coverage. If you're building a portfolio from scratch, the total market fund is the marginally more complete choice; if your only option is an S&P 500 fund, you've lost essentially nothing. This is a decision worth about thirty seconds - spend the saved energy on your savings rate instead.