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S&P500 vs. "total market"?
Old 05-06-2016, 11:23 AM   #1
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S&P500 vs. "total market"?

I've been comparing two of Vanguard's big broad-market equity funds and was wondering a couple things. The two I'm looking at are VFINX and VTSMX (i.e. S&P500 vs. Total Market). First question, is there an easy way to determine what the large/medium/small/micro-cap distribution is within VTSMX? This info does not seem to be listed anywhere on the Vanguard site that I can find, nor is it readily found in the prospectus (I skimmed it). Also I'm wondering, since the 1, 3, 5, and 10-year performance of these two funds is very similar (with VFINX just ahead by a hair over most time periods), is there any real advantage to choosing VTSMX as part of a diversified portfolio? It does include mid- and small-caps, whereas VFINX doesn't, but seems like that hasn't really been helpful at all over the past decade or so. Thoughts?
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Old 05-06-2016, 11:27 AM   #2
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If the "total market index" is cap-weighted, a total market index will probably have at least a 95% correlation with the S&P 500 index, because large caps will probably be at least 95% of the weighting in the total market.

I prefer separating out allocations to large-cap (such as an S&P 500 index) and small/mid caps (with those appropriate small/mid cap index funds or ETFs).

In reality, there isn't enough small/mid cap representation in a cap-weighted 'total market' fund for me to consider it adequate diversification across small-cap, mid-cap and large-cap segments.
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Old 05-06-2016, 11:35 AM   #3
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I like the KISS method. I just buy the S&P, with IVV at Fidelity. No commissions.
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Old 05-06-2016, 11:58 AM   #4
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Originally Posted by ziggy29 View Post
If the "total market index" is cap-weighted, a total market index will probably have at least a 95% correlation with the S&P 500 index, because large caps will probably be at least 95% of the weighting in the total market.
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I just buy the S&P, with IVV at Fidelity. No commissions.
The first quote answers your main question about why both funds have such close results. It is because they mostly overlap in composition. It is really up to you which one you go with.
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Old 05-06-2016, 12:06 PM   #5
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morningstar.com is where you go for all the details. Get a quote, then click on the "Portfolio" tab. You will see breakdown of large/mid/small and value/blend/growth.

"Performance" tab has the performance. Other tabs have other details.

In general, I think you should want small-caps, so you don't get them with VFIAX, but you do get them with VTSAX. You should want VTSAX.

Finally, I would not use "performance" to compare these funds. Sometimes large-caps do better than small-caps and sometimes not.

The total market stock index fund is also a good way to sneak in some REIT stocks while keeping all your REIT stock dividends qualified and taxed at a lower rate. This is because of the magic of mutual fund tax laws.
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Old 05-06-2016, 12:25 PM   #6
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Originally Posted by Sojourner View Post
I've been comparing two of Vanguard's big broad-market equity funds and was wondering a couple things. The two I'm looking at are VFINX and VTSMX (i.e. S&P500 vs. Total Market). First question, is there an easy way to determine what the large/medium/small/micro-cap distribution is within VTSMX? This info does not seem to be listed anywhere on the Vanguard site that I can find, nor is it readily found in the prospectus (I skimmed it). Also I'm wondering, since the 1, 3, 5, and 10-year performance of these two funds is very similar (with VFINX just ahead by a hair over most time periods), is there any real advantage to choosing VTSMX as part of a diversified portfolio? It does include mid- and small-caps, whereas VFINX doesn't, but seems like that hasn't really been helpful at all over the past decade or so. Thoughts?
Try this link:
https://www.bogleheads.org/wiki/Appr...l_stock_market

Our approach is to hold a core fund VTSMX to get the total market. Then tilt to LARGE-MID-SMALL with other funds. In our case there is 6% Total US in IRA. In another account we hold Equity 500 at 8%. In another account SMALL/MID makes up 12%.

Our choices are driven somewhat by the selections available in various accounts.
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Old 05-06-2016, 12:58 PM   #7
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Originally Posted by ziggy29 View Post
If the "total market index" is cap-weighted, a total market index will probably have at least a 95% correlation with the S&P 500 index, because large caps will probably be at least 95% of the weighting in the total market.
I believe your correlation number to be way too high. It's more like 75% correlated.
Also note that the S&P500 index is not a "Pure" cap weighted index


<From a Morningstar article on this subject.>

Quote:
a total stock market index fund encompasses a wider universe of stocks than does the S&P 500, but the difference might not be as great as you think. Stocks in the S&P 500 make up about 75% of the total U.S. equity market, so the overlap is considerable. That said, the roughly 25% of the market that is found only in the total stock market index fund does provide greater diversification because of the presence of smaller stocks.


S&P 500 is not a purely cap-determined index. A committee of economists and analysts at Standard & Poor's maintains the index and may exclude companies for a variety of reasons, including that a company is no longer considered financially viable as a result of ongoing losses, that the company's stock is not liquid enough, or because the stock throws off the index's sector balance.

you can find the article here:

S&P 500 vs. Total Stock Market: Which Is Right for You?
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Old 05-06-2016, 01:39 PM   #8
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I believe your correlation number to be way too high. It's more like 75% correlated.
Also note that the S&P500 index is not a "Pure" cap weighted index
Correlation is NOT composition. Yes, S&P500 equities are about 75% to 80% of the equities in Total Stock Market, but even mid- and small-cap stocks (i.e. non-S&P500 stocks) are highly correlated to large-cap stocks.

https://www.portfoliovisualizer.com/asset-correlations suggests that the correlation between VTSMX (total US stock) and VFINX (S&P500) is about 0.99.
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Old 05-06-2016, 02:59 PM   #9
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Thanks for the link -- very helpful to my thought process! And thanks to all for other comments and suggestions.
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Old 05-06-2016, 03:26 PM   #10
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https://www.portfoliovisualizer.com/asset-correlations suggests that the correlation between VTSMX (total US stock) and VFINX (S&P500) is about 0.99.
When you see these numbers thrown around, you have to ask... Over what timeframe ?

It makes a real difference.
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Old 05-06-2016, 04:07 PM   #11
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When you see these numbers thrown around, you have to ask... Over what timeframe ?

It makes a real difference.
Yes, it does. I provided a link so that you can test all the timeframes you want and answer your own question.
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Old 05-06-2016, 04:18 PM   #12
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I've been comparing two of Vanguard's big broad-market equity funds and was wondering a couple things. The two I'm looking at are VFINX and VTSMX (i.e. S&P500 vs. Total Market). First question, is there an easy way to determine what the large/medium/small/micro-cap distribution is within VTSMX?
VTSMX Market Capitalization as of 3/31/2016. There is a link on the website below that defines each category.

Large: 39.4%
Medium Large: 26.6%
Medium: 17.2%
Medium Small: 9.7%
Small: 7.1%

Source: https://institutional.vanguard.com/V...ls?fundId=0085
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Old 05-06-2016, 04:47 PM   #13
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Total Stock = 81% 500 Index + 19% Extended Market Index

Alternatively,
Total stock = 81% 500 Index + 4% Mid-Cap Index + 15% Small-Cap Index

See https://www.bogleheads.org/wiki/Appr...l_stock_market

When I do gains trading I'll sometimes sell Total and buy 500 and Extended Market to do an end around Vanguard's stupid frequent trading policies.
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Old 05-06-2016, 05:18 PM   #14
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In my TSP, I try to closely simulate VTSAX by going 80% C fund, 20% S fund (or 80% S&P 500, 20% the other 3,300 companies that make up the entirety of the US stock market).
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Old 05-07-2016, 06:10 AM   #15
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I believe your correlation number to be way too high. It's more like 75% correlated.
Well, saying the total market index is 95% large cap was too high, but the 95% correlation is still probably close, since small and mid caps both have fairly high correlation to large caps as well. So even if 80% are large caps and the other 20% had a 70% correlation with large caps, the overall correlation would still be close to 95% -- for example:

(0.8 * 100%) + (0.2 * 70%) = 80% + 14% = 94%.

That said, the ability to use them separately to (possibly) overweight smaller stocks and rebalance periodically makes that a better approach than a single total market index, IMO.
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Old 05-08-2016, 08:36 PM   #16
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Originally Posted by LOL! View Post
Correlation is NOT composition. Yes, S&P500 equities are about 75% to 80% of the equities in Total Stock Market, but even mid- and small-cap stocks (i.e. non-S&P500 stocks) are highly correlated to large-cap stocks.

https://www.portfoliovisualizer.com/asset-correlations suggests that the correlation between VTSMX (total US stock) and VFINX (S&P500) is about 0.99.

+1. Exactly correct !
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Old 05-10-2016, 03:20 PM   #17
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If you study market correlation and variance /covariant As part of the finance discipline you will see that there is a clear breakpoint after around 30 unique shares after which unsystematic risk reduction diminishes at a smaller and smaller rate. By the time we get to 500 large cap or 2500 total make let, the unsystemic risk has essentially been diversified away.

Anyone do a data mine for the top 20 broad market ETF or MF's and the respective holding cost (management fee, commissions Etc) ?

What is best in class ?
What is average ?
What is standard deviation. ?
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