Why Total Stock Market vs. Extended Market?

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Mike14
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Why Total Stock Market vs. Extended Market?

Post by Mike14 » Sat Sep 09, 2017 7:41 pm

Expense ratio's aside, and assuming that funds are in tax-advantaged accounts, what's your reasoning for choosing Total Stock market over Extended market?

Total Stock market is comprised ~80/20% of S&P 500 and Extended market.
Hence, if Total Stock market is outperforming the S&P 500, it is due to the Extended market.

Are you hoping that the Extended market will outperform the S&P 500, but want to hedge your bets? Otherwise, it would seem to me that one should either pick the S&P 500 or the Extended market (you either believe in the Extended market or not).

What am I missing?

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nisiprius
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Re: Why Total Stock Market vs. Extended Market?

Post by nisiprius » Sat Sep 09, 2017 7:52 pm

What you're missing is the (or at least a) rationale for investing in Total Stock Market.

The rationale for investing in Total Stock Market not a desire to outperform the S&P 500. It is a desire to mirror the "market portfolio," the portfolio consisting of all stocks traded in the stock market.

By investing only in the S&P 500, you are investing in something that's a fairly close replica of the total stock market, but you are accepting some tracking error relative to the total stock market. At one time, the Vanguard 500 index Fund was the closest thing available to investing in the total market. Then Extended Market and Total Stock became available, and it was possible to mirror the total market--but, for a while, at a higher expense ratio than 500 Index. Now, the expense ratios of Total Stock and 500 index are identical.

Although people in the forum have given me an argument on this, I feel that the "purpose" of Extended Market is simply to serve investors who, for whatever reason, already own 500 Index and find it inconvenient--perhaps for tax reasons--to sell it in order to exchange it for Total Stock.
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Taylor Larimore
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Re: Why Total Stock Market vs. Extended Market?

Post by Taylor Larimore » Sat Sep 09, 2017 7:57 pm

Mike14 wrote:
Sat Sep 09, 2017 7:41 pm
Expense ratio's aside, and assuming that funds are in tax-advantaged accounts, what's your reasoning for choosing Total Stock market over Extended market?
Mike:

A primary reason for choosing Total Stock Market over Extended Market is "Greater Diversification."

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Alexa9
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Re: Why Total Stock Market vs. Extended Market?

Post by Alexa9 » Sat Sep 09, 2017 8:06 pm

Total stock market doesn't tilt enough to small caps or value for me and many others.

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Re: Why Total Stock Market vs. Extended Market?

Post by vtMaps » Sat Sep 09, 2017 8:09 pm

I'm a bit hazy on the concept, but my understanding is that the s&p 500 is subject to a type of front-running.

This occurs when companies are added to or removed form the index. If it is known that a company will be added to the s&p 500, that means that passive s&p 500 index funds will have to buy a lot of it and that allows front-runners to profit.

In a total market index fund, this is not an issue.

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Re: Why Total Stock Market vs. Extended Market?

Post by totality » Sat Sep 09, 2017 8:31 pm

A total stock market fund is immune to index front running, which is a slight drag on return caused by active traders taking advantage of the fact that when a stock is added to or removed from an index (like the S&P 500), index fund managers will be forced to buy or sell that security.

But the primary reasons to own the total stock market are diversification and simplicity. The reason to not just hold either S&P 500 or extended market, but not both, is that nobody knows what the future holds. Nobody knows whether large-cap (S&P 500) or mid & small-cap (extended market) are going to do better in the coming decades. There have been times in the past when large-cap has done better, and times in the past when small-cap has done better, and nobody knows what's next.

So what is the investor to do? Just buy both in the form of a total stock market fund. As Jack Bogle says, "Forget the needle, buy the haystack."

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badbreath
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Re: Why Total Stock Market vs. Extended Market?

Post by badbreath » Sat Sep 09, 2017 8:57 pm

to me it is a complement to the S&P 500 which gives you the Total stock market which it even says in the description of the fund.

This fund offers investors a low-cost way to gain broad exposure to U.S. mid- and small-capitalization stocks in one fund. The fund invests in about 3,000 stocks, which span many different industries and account for about one-fourth of the market-cap of the U.S. stock market. One of the fund’s risks is its full exposure to the mid- and small-cap markets, which tend to be more volatile than the large-cap market. The fund is considered a complement to Vanguard 500 Index Fund. Together they provide exposure to the entire U.S. equity market.
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Re: Why Total Stock Market vs. Extended Market?

Post by JBTX » Sun Sep 10, 2017 2:17 am

Mike14 wrote:
Sat Sep 09, 2017 7:41 pm
Expense ratio's aside, and assuming that funds are in tax-advantaged accounts, what's your reasoning for choosing Total Stock market over Extended market?

Total Stock market is comprised ~80/20% of S&P 500 and Extended market.
Hence, if Total Stock market is outperforming the S&P 500, it is due to the Extended market.

Are you hoping that the Extended market will outperform the S&P 500, but want to hedge your bets? Otherwise, it would seem to me that one should either pick the S&P 500 or the Extended market (you either believe in the Extended market or not).

What am I missing?
You are arguing to own a slice of the market, not the total market. What is the logical end of that argument? Taken to its logical end, why not invest in the 100 riskiest stocks in the market that give the highest probability of high returns?

I can understand some people thinking some allocation other than an exact replica of the total market best suits their needs. I don't understand your argument that is should be the arbitrary choice of the top 500 stocks OR the bottom 4500.

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JoMoney
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Re: Why Total Stock Market vs. Extended Market?

Post by JoMoney » Sun Sep 10, 2017 3:49 am

I like the S&P 500 fund and use it, but if you follow the 'portfolio theory' line consider:
Over the past 20 year period Total Stock Market had a higher return than S&P500 with the same "risk adjusted return" (Sharpe ratio), and a higher Sharpe than the extended market.
PV Link
Results vary slightly over other time periods, but the S&P and TSM are usually very close regardless, and as Taylor said above there is more 'diversification' in holding a portfolio with both S&P and the Extended Market like TSM does, and the ER is the same.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

aristotelian
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Re: Why Total Stock Market vs. Extended Market?

Post by aristotelian » Sun Sep 10, 2017 6:35 am

I have both. Extended market is underperforming this year if that matters to you.

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Re: Why Total Stock Market vs. Extended Market?

Post by oldcomputerguy » Sun Sep 10, 2017 6:55 am

nisiprius wrote:
Sat Sep 09, 2017 7:52 pm
Although people in the forum have given me an argument on this, I feel that the "purpose" of Extended Market is simply to serve investors who, for whatever reason, already own 500 Index and find it inconvenient--perhaps for tax reasons--to sell it in order to exchange it for Total Stock.
Another reason might be fund availability. In my 401k we didn't have a total market fund, but we did have S&P500 and extended market index funds.
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Re: Why Total Stock Market vs. Extended Market?

Post by oldcomputerguy » Sun Sep 10, 2017 7:00 am

Mike14 wrote:
Sat Sep 09, 2017 7:41 pm
Total Stock market is comprised ~80/20% of S&P 500 and Extended market.
Hence, if Total Stock market is outperforming the S&P 500, it is due to the Extended market.
Contrariwise, if Total Stock Market is underperforming the S&P500, it is due again to the Extended Market. So I don't see the outperformance / underperformance issue to be a valid argument to pick large-cap or mid/small-cap over the other.
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Earl Lemongrab
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Re: Why Total Stock Market vs. Extended Market?

Post by Earl Lemongrab » Sun Sep 10, 2017 1:26 pm

The reason to hold both large and small cap is that you don't know which will outperform. Traditionally small has had better returns but with more volatility. As noted, some of us don't hold market weight, but do have both with tilts. In my case I own both large and small (actually split to blend and value in each) at roughly equal weights by size and value, with a separate allocation to REIT.

Large Cap: 30.00%
Large Value: 15.00%
Small Cap: 15.00%
Small Value: 30.00%
REIT: 10.00%

This is approximate, and only addresses my US allocation. International is somewhat different.
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Mike14
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Re: Why Total Stock Market vs. Extended Market?

Post by Mike14 » Tue Sep 12, 2017 4:41 pm

JoMoney wrote:
Sun Sep 10, 2017 3:49 am
Over the past 20 year period Total Stock Market had a higher return than S&P500 with the same "risk adjusted return" (Sharpe ratio), and a higher Sharpe than the extended market.
PV Link
That's a great argument, and thank you for the link.
Although, as you pointed out, different periods have different results. For example, in the past 18 years the extended market had the highest Sharpe ratio. What seems to hold constant is that historically over 15+ years the Extended Market has outperformed the Total Stock market. Sure, we don't know whether that will continue.

Mike14
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Re: Why Total Stock Market vs. Extended Market?

Post by Mike14 » Tue Sep 12, 2017 4:43 pm

JBTX wrote:
Sun Sep 10, 2017 2:17 am
Taken to its logical end, why not invest in the 100 riskiest stocks in the market that give the highest probability of high returns?
For one, transaction cost to acquire and re-balance those stocks would be prohibitive.

Mike14
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Re: Why Total Stock Market vs. Extended Market?

Post by Mike14 » Tue Sep 12, 2017 4:59 pm

totality wrote:
Sat Sep 09, 2017 8:31 pm
A total stock market fund is immune to index front running.
vtMaps wrote:
Sat Sep 09, 2017 8:09 pm
my understanding is that the s&p 500 is subject to a type of front-running.
So TSM potentially offers greater bang for the buck.
But that won't benefit people who don't have access to the Total Stock market and need to mix 80/20.

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JoMoney
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Re: Why Total Stock Market vs. Extended Market?

Post by JoMoney » Tue Sep 12, 2017 9:44 pm

Mike14 wrote:
Tue Sep 12, 2017 4:41 pm
JoMoney wrote:
Sun Sep 10, 2017 3:49 am
Over the past 20 year period Total Stock Market had a higher return than S&P500 with the same "risk adjusted return" (Sharpe ratio), and a higher Sharpe than the extended market.
PV Link
That's a great argument, and thank you for the link.
Although, as you pointed out, different periods have different results. For example, in the past 18 years the extended market had the highest Sharpe ratio. What seems to hold constant is that historically over 15+ years the Extended Market has outperformed the Total Stock market. Sure, we don't know whether that will continue.
That too is period dependent
[Link]Morningstar Chart of Wilshire 4500 Completion Index
[Link]Morningstar Chart of Wilshire 5000 Total Market Index
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LeSpy
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Re: Why Total Stock Market vs. Extended Market?

Post by LeSpy » Wed Sep 13, 2017 3:48 pm

I choose Total Market only because it represents the market as a whole and simplifies the portfolio.

I also choose Total Market only because to chose both S&P500/Large & Extended with the rationale to tilt towards one of those two choices introduces risk. The risk is that you tilt towards the wrong group and under perform the market over your investment time frame.

TomCat96
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Re: Why Total Stock Market vs. Extended Market?

Post by TomCat96 » Wed Sep 13, 2017 4:06 pm

Mike14 wrote:
Sat Sep 09, 2017 7:41 pm
Expense ratio's aside, and assuming that funds are in tax-advantaged accounts, what's your reasoning for choosing Total Stock market over Extended market?

Total Stock market is comprised ~80/20% of S&P 500 and Extended market.
Hence, if Total Stock market is outperforming the S&P 500, it is due to the Extended market.

Are you hoping that the Extended market will outperform the S&P 500, but want to hedge your bets? Otherwise, it would seem to me that one should either pick the S&P 500 or the Extended market (you either believe in the Extended market or not).

What am I missing?
What are you missing? Not much.
I have conducted my own analysis and found exactly as you have. Currently 100% of my 401k portfolio is in the extended fund. I am in my mid 30s, have high risk tolerance, and have a long investment horizon.

From what I have found, the extended market's out-performance of the S&P 500 itself is small. But the trend was sufficiently definite for me to take the plunge. From my analysis the extended fund outperforms the S&P most of the time. It also helps that a greater proportion of the gains are in stock price as opposed to dividends.

In my opinion if you have a taxable account in which you have
1) investment A which pays 10% CAGR in stock price appreciation, and
2) investment B which pays 10% CAGR with some proportion in stock price appreciation, and some portion in dividends,

then investment A is superior for you because you aren't paying taxes on those dividends.

Initially my investments comprised a reverse total market. Total market if if i remember 81% S&P 500, 19% extended fund.
My portfolio was 80% extended fund, 20% S&P.

I don't know if the risk/reward ratio was superior to total market, the US market, or some proportion. But undoubtedly you are going to be less diversified in the extended fund than total market.

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Taylor Larimore
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What experts say

Post by Taylor Larimore » Wed Sep 20, 2017 9:23 pm

I have conducted my own analysis and found exactly as you have. Currently 100% of my 401k portfolio is in the extended fund. I am in my mid 30s, have high risk tolerance, and have a long investment horizon
.
TomCat96:

I respectfully suggest that you read what experts say (and don't forget bonds):

viewtopic.php?f=10&t=156579

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Mike14
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Re: Why Total Stock Market vs. Extended Market?

Post by Mike14 » Sun Sep 24, 2017 6:28 pm

JoMoney wrote:
Tue Sep 12, 2017 9:44 pm
Mike14 wrote:
Tue Sep 12, 2017 4:41 pm
JoMoney wrote:
Sun Sep 10, 2017 3:49 am
Over the past 20 year period Total Stock Market had a higher return than S&P500 with the same "risk adjusted return" (Sharpe ratio), and a higher Sharpe than the extended market.
PV Link
That's a great argument, and thank you for the link.
Although, as you pointed out, different periods have different results. For example, in the past 18 years the extended market had the highest Sharpe ratio. What seems to hold constant is that historically over 15+ years the Extended Market has outperformed the Total Stock market. Sure, we don't know whether that will continue.
That too is period dependent
[Link]Morningstar Chart of Wilshire 4500 Completion Index
[Link]Morningstar Chart of Wilshire 5000 Total Market Index
Thank you for the links!
S&P 500 came out ahead compared to TSM and Extended.

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