S&P 500 vs. TSM index

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pdc3610
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S&P 500 vs. TSM index

Post by pdc3610 »

I have been reading forum posts for nearly a year now and understand that a basic US Stock, International Stock, and Bond fund mix is a great starting (if not also ending) point for a portfolio. I frequently see S&P 500 index funds and have a low cost fund of that variety available in my 401k options. Is this equivalent to a Total US Stock Market Index fund? As for international index funds, how is one to know whether an international fund adequately represents the international market?
dickenjb
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Re: S&P 500 vs. TSM index

Post by dickenjb »

The S&P500 fund needs to be combined with a "completion fund" to equal TSM. Having said that, if a completeion fund is unavailable you can make do with S&P 500 index fund.

The international fund should hold market weights of developed and emerging markets.

If you post the funds available to you in your 401(k) along with expense ratios, we can provide more guidance.
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ruralavalon
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Re: S&P 500 vs. TSM index

Post by ruralavalon »

An S&P 500 fund is an acceptable substitiuute for a TSM fund, if no TSM fund is offered. Also you can try to approximate a total maket fund by supplementing with other funds. Wiki article link: Approximating Total Stock Market .

For an International fund, look to make sure both developed an emerging markets are covered. Its better if int'l mid caps and small caps are covered too. On Morningstar look at a fund's "portfolio" tab for this information. Or look to see which index a fund is tracking, and google that index to see what it covers.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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CABob
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Re: S&P 500 vs. TSM index

Post by CABob »

The S&P500 and Total Market are not equivalent. The S&P500 index contains 500 companies while a total market index represents somewhere around 5000 companies which includes some small and mid cap companies. The index is, however, dominated by large cap companies (about 70%) so the two indexes tend to track each other quite closely. As pointed out above it takes some tinkering to represent the total market with a 500 fund, but, if your plan has a good 500 fund and nothing else it makes a good core holding.
Bob
lloydbraun
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Re: S&P 500 vs. TSM index

Post by lloydbraun »

My 403 B offers Vanguard 500 and Vanguard's Extended Market and I use both to create a TSM, although I slightly overweight the latter. However, in his book "Common Sense on Mutual Funds", Bogle claims that in the long run the 500 can act as a replacement for the TSM as both tend to have nearly identical returns over long periods of time. He stresses that this is not the case in the short term. I'm not sure if the future will look like the past so I prefer to hold the entire market but I figured it was worth bringing in Bogle on this one.
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hoppy08520
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Re: S&P 500 vs. TSM index

Post by hoppy08520 »

A few additional notes to add to what the others wrote:

If you're a new investor, or a long-time investor who's just starting to learn about what you're investing in, it's a bit puzzling when you first learn about "total stock market" indexes when you've been hearing so much about the S&P 500 for so long. Along with the Dow Jones, the S&P 500 is the most recognizable benchmark that laypeople can identify in the stock market. As a result, many people think the S&P 500 is the stock market, or at least the US stock market.

Eventually, you start reading about "total stock market" funds and then naturally start to wonder what these are about, since there's already the S&P 500, which you probably thought is pretty "total" already.

Well, as you're learning, the S&P 500, as an investment vehicle, is really an anachronism built around the hype of the S&P 500 as an economic measure of the stock market and as a valuable marketing term of Standard & Poors. The very first index fund (I believe) was started by Mr. John C. Bogle at Vanguard, and it was based on the S&P 500 index because investors were familiar with it. That fund (VFINX) is still going strong. At the time, it was easier and more economical to build an index fund around larger companies than it was around smaller companies. That's still true today: the expense ratio of VFINX is 0.17%, compared to 0.28% for the extended market index fund (VEXMX) which is the rest of the US stock market (for reference, Vanguard's TSM fund is 0.18%, just a tiny bit more than the 500 index fund). The name recognition of the S&P 500 persists which is why there are so many index funds that track this index even though most ordinary investors would probably be better off with a total US stock market index fund over a 500 index fund.

Objectively, the only reason you'd want to hold an S&P 500 index fund as a proxy for the US stock market, rather than a TSM fund, is if:
* You already own it, in a taxable account, and you don't want to sell it because of capital gains taxes (in which case you'd be advised to hold funds in a completion index somewhere else)
* You are in a 401(k) plan where your best or only option is to hold an S&P 500 Index fund (in which case, same as above, you should probably hold a completion index)
* You are trying to overweight small caps (or small cap value) so you want to hold maybe 50% in the S&P 500 and 50% in a small cap value fund (although many would advise instead to hold 55-60% in a TSM fund and 40-45% in a SCV fund (or some other ratio) instead so that you've covering the whole market more completely; with a 55/45 split, you're duplicating some SCV because the TSM fund also has some SCV).
* One other possibility is the inverse of the first bullet above: you already own a small-cap or extended-market index fund, and you want a large-cap fund to complement it to approximate a holding in the total US stock market.

In your particular case, you might want to hold the 500 index fund in your 401(k) because of bullet #2 above.

As for international, generally people here like Vanguard's Total International Index Fund, which attempts to hold a market-weighted share of all investable publicly traded companies. What makes VG's TISM fund different from so many other international funds is that many other international funds will either lack emerging markets or small-cap companies. Many international index funds might track the MSCI EAFE index, for example, which only has stocks in large-cap developed markets outside North America, meaning no Canadian stocks even though it's an "international" index and even though Canada is 8% of the world's stock market.
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pdc3610
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Re: S&P 500 vs. TSM index

Post by pdc3610 »

Thank you for the replies. This is very helpful. I suspected this was the case (S&P index does not equal TSM index) but wasn't entirely certain.

Funds that are available that appear to be index or index completion funds are:

Vanguard Institutional Index fund(VINIX) - ER 0.04%
Vanguard Mid-Cap Index Fund Signal Shares (VMISX) - ER 0.10%
Vanguard Small-Cap Inde Fund Signal Shares (VSISX) - ER 0.16%
American Funds EuroPacific Growth Fund R6 (RERGX) - ER 0.50%
Blackrock Inflation Protected Bond Portfolio Institutional Class (BPRIX) - ER 0.61%
Vanguard Total Bond Market Index Fund Signal Shares (VBTSX) - ER 0.10%


International Fund (IHBIF) - ER 0.99%
Emerging Markets Fund (DFEMX) - ER 0.61
Stock Index Fund (VIIIX) - ER 0.02%
Bond Fund (PTTRX) -ER 0.46%

How do VINIX and VIIIX compare? It appears they are both S&P 500 index funds. I am thinking I could create a nice portfolio with either VIIIX or VINIX and complete the TSM with some VMISX and VSISX then use RERGX for international exposure along with DFEMX for completion of the international market. The bond fund seems pretty obvious with VBTSX given the low ER.
lloydbraun
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Re: S&P 500 vs. TSM index

Post by lloydbraun »

Vinix is what I have in my 403 B and it's the same as the other Vanguard 500 but it has a lower expense ratio because it's institutional class. You can, I believe, create a completion TSM index out of VINIX, VMISX, and VSISX. Let's pretend that you were allocation 100% to creating a TSM. The following allocation would complete the index more or less accurately, depending on the year.

78% VINIX
12%VSISX
10% VMISX

I might be slightly off (1-3% points) but I'm pretty sure this is the TSM.

However, you could overweight small and medium caps and do a 70% VINIX and then 15% for the other two.
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hoppy08520
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Re: S&P 500 vs. TSM index

Post by hoppy08520 »

pdc3610 wrote:How do VINIX and VIIIX compare? It appears they are both S&P 500 index funds.
Correct, these are different share prices of the same underlying fund. VFINX (the original index fund) is the investor share class of the 500 index fund. Generally, the more you can invest, the cheaper your share price. Many times, larger 401(k) plans with high assets can qualify for the signal (better) or institutional (best) share classes.

It would be unusual for you to have both of these share classes in one plan. Are you showing funds available in two or more accounts?
pdc3610 wrote: I am thinking I could create a nice portfolio with either VIIIX or VINIX and complete the TSM with some VMISX and VSISX then use RERGX for international exposure along with DFEMX for completion of the international market. The bond fund seems pretty obvious with VBTSX given the low ER.
That would be a pretty good 3-fund portfolio (in spirit, as you'd need to hold a few more than 3). Emerging markets are around 23% of vanguard TISM so you might want to hold RERGX and DFEMX at 75%/25%. Better yet, try to hold your internAtional allocation in an IRA so you can have VG TISM at a lower ER, and have a more complete intl fund.
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CABob
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Re: S&P 500 vs. TSM index

Post by CABob »

How do VINIX and VIIIX compare? It appears they are both S&P 500 index funds.
Good question. And they both appear to be institutional funds with one having a lower expense ratio.
Anyone?
Bob
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