S&P 500 vs. Total Market Index: Best for Long-Term Growth?

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The S&P 500 and a total market index fund deliver very similar results over the long run, because the 500 large companies in the S&P 500 make up about 80% of the value of the entire U.S. stock market. A total market fund holds those same companies plus thousands of mid-cap and small-cap stocks. Which is better for long-term growth comes down to whether you want that last 20% of the market, the smaller companies, in your portfolio. Smaller stocks add growth potential in some periods and drag in others, and they bring more volatility. For most long-term investors, choosing one and sticking with it matters far more than which one it is.

What each index actually holds

The S&P 500

The S&P 500 is an index maintained by S&P Dow Jones Indices. An S&P 500 index fund or ETF buys the stocks in that index to match its return. The index has existed in its 500-stock form since 1957.

Membership is decided by the S&P Index Committee rather than by a purely mechanical rule. Companies must meet requirements that include:

• Market capitalization: a minimum size threshold that the committee adjusts over time.
• Liquidity and float: shares must trade actively and enough of them must be available to the public.
• Profitability: the sum of the most recent four quarters of reported (GAAP) earnings must be positive, as must the latest quarter.
• Domicile: the company must be a U.S. company under the index rules.

The index holds slightly more than 500 securities because some companies have more than one share class listed. Alphabet, for example, appears through both GOOG and GOOGL.

The S&P 500 is market-cap weighted, so the largest companies have the most influence on its performance. A small group of mega-cap technology and communication companies accounts for a large share of the index, and moves in those few stocks can drive much of its return in a given year.

Total market indexes

A total market fund tracks an index designed to cover nearly every publicly traded U.S. company. Common benchmarks include:

• CRSP US Total Market Index
• Dow Jones U.S. Total Stock Market Index
• S&P Total Market Index
• Russell 3000 Index
• Wilshire 5000 Total Market Index

These indexes differ in construction details, such as how many stocks they include and how often they rebalance, but all of them hold every S&P 500 company alongside thousands of mid-cap and small-cap names, and they produce very similar returns. They are also market-cap weighted, so large caps still make up about 80% of a total market fund by weight. The smaller companies are numerous but individually tiny in the portfolio.

Unlike the S&P 500, these indexes do not apply a profitability screen. A total market fund owns unprofitable young companies, recent IPOs and firms too small to qualify for the S&P 500.

How much the two overlap

The overlap is the most important fact in the comparison. A total market fund is roughly 80% an S&P 500 fund by weight, with the same top holdings in nearly the same order and a sector mix close to the S&P 500’s.

If you want total market coverage but already own an S&P 500 fund, an extended market (or “completion”) fund does that job. These funds track indexes such as the S&P Completion Index or the Dow Jones U.S. Completion Total Stock Market Index, which hold the U.S. stocks that are not in the S&P 500. Combining an S&P 500 fund with an extended market fund in roughly an 80/20 ratio approximates a total market fund. This is useful in workplace plans that offer an S&P 500 fund and an extended market fund but no total market option.

Performance history

Since 1957 the S&P 500 has produced average annual total returns of roughly 10% before inflation, with dividends reinvested. The index has recovered from every major decline in its history. During the 2007 to 2009 financial crisis it fell 56.8% from peak to trough, then took several years to regain its prior high and go on to new records.

Total market returns track the S&P 500 closely because of the overlap. The gap between them in any period depends on one question: did smaller companies beat larger ones or lag them? When mid-caps and small-caps outperform, the total market fund comes out ahead. When mega-caps lead, as they did through much of the period when large technology companies grew rapidly, the S&P 500 edges ahead. Over long periods the cumulative difference between the two has been small in either direction.

Academic research beginning in the early 1990s identified a “size premium,” the tendency of small stocks to earn higher returns than large stocks over long periods. Later studies have debated how reliable that premium is. It has appeared in some decades and been absent or negative in others, so it is a possible source of extra return rather than a dependable one.

Example: how the small-cap slice moves the result

This is a hypothetical example to show the mechanics, not a forecast. Assume a total market fund is 80% large caps and 20% mid and small caps by weight.

• If large caps return 10% in a year and smaller stocks return 4%, the total market fund returns about (0.80 × 10%) + (0.20 × 4%) = 8.8%, compared with 10% for the S&P 500.
• If large caps return 10% and smaller stocks return 16%, the total market fund returns about (0.80 × 10%) + (0.20 × 16%) = 11.2%.

Even a 6-percentage-point difference between large and small stocks moves the total market fund only about 1.2 points away from the S&P 500.

Volatility and risk

Smaller companies tend to be more volatile than large ones, so total market indexes are slightly more volatile than the S&P 500 and can fall further in sharp declines. The reasons small and mid-size companies carry more risk include:

• Less financial cushion to absorb a downturn
• More limited access to credit and capital markets when conditions tighten
• Narrower customer bases and product lines
• Greater exposure to discretionary spending that consumers cut first

Large caps are not immune. In a bear market both funds fall, and the S&P 500’s concentration in a handful of mega-caps is a risk of its own. The difference in volatility between the two funds is modest because large caps dominate both. Neither should be treated as the “safe” choice.

The broader holdings of a total market fund do reduce dependence on any single company slightly, since each large stock’s weight is a bit lower when thousands of smaller names are added.

Which one should you choose?

Investment goals

• One-fund simplicity: If you want a single fund for all of your U.S. stock exposure, a total market fund covers large, mid and small caps without any extra decisions.
• Core and satellite: If you want to build the portfolio from parts, an S&P 500 fund works as a large-cap core, and you can add separate small-cap, mid-cap, value or sector funds in the amounts you choose.

Risk tolerance

• Steadier ride: The S&P 500’s large-cap focus has typically meant slightly shallower drawdowns.
• More growth exposure: If you can tolerate larger swings and want a share in smaller companies’ growth, the total market fund includes them automatically.

Time horizon

• Multiple decades: A long horizon gives any size premium more time to show up and more time to recover from the extra volatility.
• Within about 10 years: If you expect to draw on the money soon, the choice between these two matters less than how much of your portfolio is in stocks at all. Bonds and cash do more to reduce near-term risk than switching from one stock index to the other.

Other portfolio considerations

• International exposure: Both funds hold only U.S. stocks. If you want global diversification, deciding how much to hold abroad, through a total world fund or a separate international fund, matters more than choosing between these two.
• Avoiding overlap: If you already own small-cap or mid-cap funds, an S&P 500 fund avoids doubling up on those segments. If you own nothing else, a total market fund fills the gap on its own.
• Account limitations: Retirement plans often offer only one of the two. An S&P 500 fund alone still captures about 80% of the U.S. market.

Costs, taxes and fund details

Major providers offer both types of fund at low expense ratios, and the cost gap between a provider’s S&P 500 fund and its total market fund is often small. Expense ratios, minimums and fees still differ across providers and share classes, so compare the specific funds and class your account offers.

ETF versions of both are generally tax-efficient in taxable accounts because index turnover is low. Total market funds have a structural advantage here. When a company grows large enough to join the S&P 500, an S&P 500 fund must buy it and sell a departing stock. A total market fund already owns both companies and only sees their weights change. Over time, that means less forced trading.

The Bottom Line

Long-term investors deciding between these two funds can choose either with confidence, since they share most of their holdings and returns. A total market fund suits someone who wants one fund covering all U.S. sizes, while an S&P 500 fund fits a plan built from separate parts or a workplace menu with limited options. Staying invested, setting the stock and bond mix, and deciding on international exposure matter more than which index you pick.