S&P 500 vs. Total Stock Market Index: Which Performs Better?

The S&P 500 Index and a total stock market index both offer investors a way to gain broad market exposure, but they differ in significant ways that can impact your returns. The S&P 500 tracks 500 of America’s largest companies, representing about 80% of the available market capitalization. Meanwhile, total stock market indexes cast a wider net, including mid-cap and small-cap stocks alongside the large companies. While performance differences aren’t always dramatic, the structural differences between them can be meaningful. One or the other may be more suitable based on your financial goals, risk tolerance and investment timeline.

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What Is the S&P 500?

The S&P 500 is a stock market index that tracks the performance of 500 large companies listed on U.S. stock exchanges. Created in 1957, it is one of the most widely followed equity indices and a bellwether for the American economy. The index is weighted by market capitalization, meaning larger companies have a greater influence on its movement than smaller ones.

Not just any company can join the S&P 500. To be added to the index, a company must meet specific criteria. These include a market capitalization of at least $20.5 billion and sufficient liquidity. A committee at S&P Dow Jones Indices reviews the index regularly, adding or removing companies to keep it representative of the broader U.S. economy.

The S&P 500 can provide investors with a snapshot of overall market health and economic outlook. Investors can’t buy the S&P 500 index directly, but they can invest in mutual funds and exchange-traded funds (ETFs) designed to mirror its performance. These funds offer a low-cost way to gain broad market exposure and diversification without buying individual stocks, making them popular among both new and experienced investors.

What Is the Total Stock Market Index?

A total stock market index is a financial benchmark that tracks the performance of nearly all investable U.S. stocks. Unlike narrowly focused indexes like the S&P 500 (which includes only large-cap companies), a total stock market index includes thousands of stocks across large-, mid- and small-cap segments. This comprehensive approach offers investors a single metric that represents the broader market’s performance rather than just a segment of it.

Several named indexes position themselves as total stock market indexes. While they don’t aim to include every publicly traded stock, they typically include several thousand companies of varying sizes and from different sectors.

The Wilshire 5000, for example, was originally designed to track approximately 5,000 publicly traded U.S. companies, though the actual number fluctuates due to changes in the market. Other popular total market indexes include the CRSP US Total Market Index and the Russell 3000. This diversity helps capture movements across the entire economy rather than just its largest players.

Many investment products are built upon total stock market indexes. Index funds that track these broad market benchmarks have become increasingly popular among investors seeking low-cost, diversified exposure to equities. These funds aim to replicate the performance of their underlying index by holding the same securities in similar proportions, offering investors a simple way to own a close facsimile of the entire market through a single investment vehicle.

One of the primary advantages of total stock market indexes is their inherent diversification. By including companies of various sizes, industries and growth stages, these indexes reduce the risk of concentration in one market segment. This can help smooth out returns over time, as different market segments often perform differently under various economic conditions.

S&P 500 vs. Total Stock Market: Key Differences

While the S&P 500 and total stock market indexes share some similarities, they differ in ways that can affect your portfolio strategy.

Market Coverage

The S&P 500 tracks approximately 500 of the largest U.S. companies, representing about 80% of the available market capitalization. In contrast, a total stock market index seeks to track the full U.S. equity market, including small- and mid-cap stocks that may offer more growth potential.

Company Size Exposure

The S&P 500 focuses exclusively on large-cap companies, which typically offer more stability but potentially lower growth rates. Total stock market indexes include exposure to thousands of companies across all market capitalizations. This provides access to the growth potential of smaller companies that may outperform during certain market cycles.

Sector Weighting

The S&P 500 can have more concentrated sector weightings due to its focus on large companies. Total stock market indexes generally provide broader sector diversification by including companies from a wider range of sectors and industries. This may reduce sector-specific risks.

Historical Performance

While the S&P 500 has historically delivered strong long-term returns, total stock market indexes sometimes outperform during periods when small and mid-cap stocks excel. The performance difference between these major indices can vary significantly depending on economic conditions and market trends.

Which Should You Invest in for Your Portfolio?

When deciding between S&P 500 and total stock market index funds for your portfolio, start by examining your investment objectives. The S&P 500 offers stability and consistent returns, while total stock market indexes potentially capture additional growth opportunities. Your time horizon and risk tolerance should guide your choice.

Diversification plays a central role in this choice. Total stock market indexes offer broader exposure to thousands of companies across all market capitalizations. This broader approach may help reduce volatility during market fluctuations. The S&P 500, while less diverse, still provides significant diversification across major economic sectors and industries that drive the American economy.

Rather than choosing between S&P 500 and total stock market index funds, many investors choose both. The S&P 500 can serve as a core holding while total market funds add exposure to smaller companies. This combined approach provides comprehensive market coverage while maintaining a tilt toward the stability of established large companies.

Bottom Line

Both indices have delivered similar long-term returns. The S&P 500 occasionally outperforms during periods when large caps dominate. A total stock market index may have an edge during small-cap rallies. For many investors, either option represents a solid foundation for a long-term investment strategy. Some choose to hold both, gaining the stability of blue-chip stocks while maintaining exposure to the complete U.S. market. Ultimately, sticking to a consistent investment strategy and long-term view may be more impactful than choosing between the two index types.

Investing Tips

A financial advisor can help align your investment choices with your financial goals and offer guidance during periods of uncertainty. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Markets go through cycles. Making investment decisions based on fear or hype can undermine long-term results. Spread your investments across asset classes, sectors and regions. Diversification can reduce the impact of any single investment’s poor performance.