Approximating total stock market
Approximating total stock market shows how you can combine funds to mimic the composition of the U.S. stock market.
Investors who want to invest in a Total Stock Market Index Fund often face a situation where they have to approximate it with the funds available in their employer sponsored plans, perhaps also using funds in other accounts, for example a Roth IRA.
This page shows some examples of how to approximate a Total Stock Market Index Fund with funds that cover specific parts of the market.
Total stock market index
This table shows Total Stock Market Index Funds from four different providers. The aim is to approximate these Morningstar style boxes using available funds chosen from the two-fund and three-fund tables below.
Total Stock Market index funds | Morningstar style box | |||||||||||||||
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100% Vanguard Total Stock Market Index Fund (VTSAX)
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100% iShares Core S&P Total U.S. Stock Market ETF (ITOT)
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100% Schwab U.S. Broad Market ETF (SCHB)
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100% Fidelity ZERO Total Market (FZROX)
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Approximating total stock with two funds
These examples match the composition of the total US stock market using two funds.
Match Total Stock Index with two funds | Morningstar style box | |||||||||||||||
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82% Vanguard 500 Index Fund (VFIAX) 18% Vanguard Extended Market Index Fund (VEXAX) |
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85% Vanguard Large Cap Index Fund (VLCAX) 15% Vanguard Small-Cap Index Fund (VSMAX) |
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92% iShares Russell 1000 ETF (IWB) 8% iShares Russell 2000 ETF (IWM)[note 1] |
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85% Vanguard 500 Index Fund (VFIAX) 15% Vanguard Small-Cap Index Fund (VSMAX) |
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90% Vanguard 500 Index Fund (VFIAX) 10% iShares Russell 2000 Index (IWM) |
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90% Vanguard 500 Index Fund (VFIAX) 10% Vanguard Tax-Managed Small-Cap Fund Inv (VTMSX) |
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83% Fidelity ZERO Large Cap Index Fund (FNILX) 17% Fidelity ZERO Extended Market Fund (FZIPX) |
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Approximating total stock with three funds
These examples match the composition of the total US stock market using three funds.
Match Total Stock Index with three funds | Morningstar style box | |||||||||||||||
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85% Vanguard 500 Index Fund (VFIAX) 10% iShares S&P MidCap 400 ETF (IJH) 5% iShares S&P SmallCap 600 ETF (IJR) Updated 31 May 2021 |
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83% Fidelity 500 Index Fund (FXAIX) 8% Fidelity Mid Cap Index Fund (FSMDX) 9% Fidelity Small Cap Index Fund (FSSNX) Updated 31 May 2021 |
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85% Vanguard S&P 500 ETF (VOO) 10% Vanguard S&P Mid-Cap 400 ETF (IVOO) 5% Vanguard Russell 2000 ETF (VTWO)[note 2] Updated 22 July 2021 |
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Table notes
For the above tables:
- The style box numbers were computed by Morningstar Instant XRay by entering each fund ticker as a holding, and entering the dollar value based on the percentage; for example, for VFIAX at 81% and VEXAX at 19%, enter $81 and $19 respectively and observe the computed Morningstar Style Box on the Instant X-Ray tab. Enter different dollar amounts (always adding up to $100) in a trial and error fashion until you replicate the same computation as Total Stock Market, or as close as you can get. You need a free (or paid) subscription to Morningstar to access Instant Xray.
- Computation used the method of least squares
- If you are thinking of using an S&P MidCap 400 fund, for example, you might consider the example above that uses IJH. However, there may be slight implementation differences between the S&P MidCap 400 fund you have access to and IJH.
- Two funds may appear to track the same portion of the market (say, mid-cap), but their holdings may differ depending on the indexes they track.
Stock market classifications
Style box format
Style boxes use the following format. Numbers shown are percentages. Because values are rounded, the percentages may not total exactly 100%.
Value | Blend | Growth | |
LV | LB | LG | Large |
MV | MB | MG | Mid |
SV | SB | SG | Small |
Size
Stocks may be classified by the size of the corporation. This is most commonly done by market capitalization. Market capitalization is simply a measurement found by taking a stock's current share price and multiplying it by the number of stock shares outstanding.
Exact market cap ranges will vary among different financial and rating institutions, but there are three different terms commonly used to describe stocks by their general size.
- Large cap stocks have a market cap over $10 billion.
- Mid cap stocks have a market cap between $2 billion and $10 billion.
- Small cap stocks have a market cap between $300 million and $2 billion.
The Morningstar style box uses percentages rather than fixed dollar thresholds for size classification.[1]
Style
Stocks may also be classified by "style," one of Value, Blend, or Growth.
- Growth stocks are companies that are growing their profits at a very fast rate and are expected to continue to grow at an increasing rate.
- Value stocks are stocks that tend to trade at deep discount relative to their intrinsic value (as defined by profits, book value, and so on).
Investors commonly think of growth stocks as "high flying companies" and value stocks as "distressed companies." Both growth and value stocks have taken turns leading and lagging one another during different markets and economic conditions.[note 3]
Notes
- ↑ See this Bogleheads forum post: "Re: Follow up questions - total stock market approximation", hoppy08520. Jan 03, 2013 for more on combining these two funds to approximate total stock market.
- ↑ This combination might interest you if you have a 401(k) plan held at John Hancock Funds, which offers 3 similar funds: JEINX tracks the S&P 500, JECIX follows the S&P Midcap 400, and JESIX tracks the Russell 2000. (As of November 1, 2015, the John Hancock ticker symbols are no longer available in Morningstar Instant X-Ray.) In addition, this also similarly mirrors the offerings available to State of CA employees who invest at SavingsPlusNow, which offers Large Cap, Mid Cap, and Small Cap index funds that mirror the same. (As of March 16, 2023)
- ↑ You can see the alternating performance of the growth and value stocks on the Callan periodic table of investment returns, which visualizes performance of different asset classes.
See also
- Replicating total stock market with the Thrift Savings Plan
- Approximating total international stock market
References
- ↑ "Fact sheet: The new Morningstar style box methodology" (PDF). Morningstar. Archived from the original (PDF) on August 22, 2022.