Approximating total stock market

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 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.

Approximating total stock with two funds
These examples match the composition of the total US stock market using two funds.

Approximating total stock with three funds
These examples match the composition of the total US stock market using three funds.

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.

Style box format
Style boxes use the following format. Numbers shown are percentages. Because values are rounded, the percentages may not total exactly 100%.

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.

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.