Index funds have become extremely popular with investors in recent decades as a cost-effective way to access highly diversified portfolios. Through mutual funds and ETFs, total market index funds allow investors to purchase a basket of stocks that track an index focused on the general U.S. stock market or markets around the world. They can be a great way for investors to benefit from a country’s economic growth without having to select which individual companies to invest in.
Here’s what else you need to know about total market index funds and some options to consider.
What is a total stock market index fund?
A Total Market Index Fund is an investment fund or ETF that tracks an index that focuses on virtually the entire stock market of a country or region. Many people are familiar with index funds that track popular indexes such as the S&P 500 or the Dow Jones Industrial Average, but these funds hold companies with large market capitalizations and exclude small and mid-cap companies. Total market funds hold companies across the market capitalization spectrum and allow investors to earn the returns of the total stock market.
Most total market index funds are weighted by market capitalization, so the funds will still have large exposure to the largest companies in the US, such as Amazon, Apple and Microsoft. But the funds will also own small-cap companies that may have more room to grow and potentially deliver higher returns than their large-cap counterparts.
Total market index funds typically have very low expenses, meaning a greater portion of the returns accrue to the investors in the funds. This is an important part of index fund investing, allowing investors to earn market returns without having to have deep financial knowledge or stock-picking skills. Keeping costs low has proven to be a successful investment strategy for many.
Top Performing Total Stock ETFs
Bankrate selected its top funds based on the following criteria:
- US funds that appear in ETF.com’s screener for the entire US market
- Funds were among the top performers of the past five years
- Performance measured on April 1, 2024 based on the most recent figures
Vanguard Total Stock Market ETF (VTI)
This ETF seeks to track the performance of the CRSP US Total Market Index and invests in large, medium and small companies across all value and growth styles.
- Achievements to date: 10.0 percent
- Historical performance (5-yearly): 14.2 percent
- Cost ratio: 0.03 percent
Schwab US Broad Market ETF (SCHB)
The objective of this fund is to track the total return of the Dow Jones US Broad Stock Market Index, which includes companies across the market capitalization spectrum.
- Achievements to date: 10.0 percent
- Historical performance (5-yearly): 14.3 percent
- Cost ratio: 0.03 percent
iShares Core S&P Total US Stock Market ETF (ITOT)
This fund aims to track the performance of the S&P Total Market Index and currently holds over 2,500 securities.
- Achievements to date: 9.9 percent
- Historical performance (5-yearly): 14.2 percent
- Cost ratio: 0.03 percent
SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM)
This fund seeks to match as closely as possible the total return of the S&P Composite 1500 Index, which represents approximately 90 percent of the investable U.S. stock market.
- Achievements to date: 10.1 percent
- Historical performance (5-yearly): 14.7 percent
- Cost ratio: 0.03 percent
Top Performing Total Stock Market Mutual Funds
Many of the ETFs mentioned above are also offered in the form of mutual funds. But keep in mind that mutual funds typically have an investment minimum of a few thousand dollars and can only be traded once a day at the fund’s closing price. On the plus side, they may have slightly lower fees than comparable ETFs. Below are some total market mutual funds that you can also consider.
Fidelity Total Market Index Fund (FSKAX)
The objective of this fund is to generate returns equivalent to the total return on a broad range of US stocks, and the fund typically has approximately 80 percent of its assets invested in stocks included in the Dow Jones US Total Stock Market Index.
- Achievements to date: 10.1 percent
- Historical performance (5-yearly): 14.4 percent
- Cost 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, which includes approximately 3,500 stocks and is market capitalization weighted.
- Achievements to date: 9.7 percent
- Historical performance (5-yearly): 14.0 percent
- Cost ratio: 0.58 percent
*Note: Mutual fund performance data as of March 28, 2024
Frequently asked questions about stock index funds
What are the pros and cons of investing in total market index funds?
There are several advantages to investing in total market index funds, but there are also some disadvantages to consider. Here are the pros and cons to consider:
Benefits of Total Market Index Funds
- Diversification: Through one security you can have a broadly diversified portfolio across market capitalizations and investment styles.
- Low costs: These funds are relatively easy to find and have a very low expense ratio, meaning you’ll likely only pay a few dollars for every $10,000 you invest.
- Very little research required: Because these funds aim to match the performance of the entire stock market, you don’t have to spend time researching which sectors or companies are likely to outperform.
- Earn long-term returns on stocks: Buying a total market fund can give you the long-term returns in that region’s stock market, as long as you can stay invested.
- Quickly add geographic visibility: These funds are also an excellent way to add a new region to your portfolio quickly and without much effort.
Disadvantages of Total Market Index Funds
- Growth is limited: Your returns are limited to the total stock market and likely won’t vary much if you choose different total market funds.
- Disadvantage of broad diversification: Because these funds are so broadly invested, you miss out on outsized gains when a particular segment of the market does well. If small caps achieve large outperformance, a total market fund will likely lag behind.
- Difficult to stay disciplined: Investing in total market index funds can be a bit boring, even though it is a very sensible way to invest. Boring strategies can sometimes be difficult to maintain, especially when other areas are performing better.
Who Should Invest in Total Market Index Funds?
Total market index funds can be an excellent choice for both new and experienced investors. They are one of the easiest ways to gain broad exposure to the stock market at a low cost. You don’t have to be a financial expert to buy and hold the fund’s shares, making them an excellent choice for investors saving for long-term goals like retirement. Don’t forget to check the fund’s expense ratio to ensure you’re paying the lowest possible costs.
Why are Vanguard Total Stock Market Index Fund Admiral Stocks So Popular?
The Vanguard Total Stock Market Index Fund’s Admiral shares are popular because they allow investors to gain exposure to the entire U.S. stock market at a low cost. Vanguard has a reputation for doing what’s best for investors. Admiral shares keep costs low while requiring lower investment minimums than other share classes. To invest in the Admiral shares of an index fund, you must maintain a $3,000 investment in the fund, paying only 4 basis points, or 0.04 percent, in annual fees. This means that for every €10,000 you have in the fund, you pay €4 in costs.
In short
Total market index funds are an excellent way for investors to access a broadly diversified stock portfolio at a very low cost. Index funds have been found to generally outperform actively managed funds, in part because of their low costs. Consider making a total market mutual fund or ETF a core part of your long-term investment plan.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
