Approximating total stock market

From Bogleheads
Jump to: navigation, search

Approximating total stock market shows how funds can be combined in order to mimic the composition of the U.S. stock market.

Investors wishing to invest in Vanguard Total Stock Market Index Fund often face a situation where they have to approximate it with the funds available in their employer sponsored plans and quite possibly some other funds available in other accounts such as a Roth IRA.

This page shows a few examples of approximating Vanguard Total Stock Market Index Fund with funds covering specific parts of the market.

Stock market classifications

Size

Stocks may classified by the size of the corporation. This is most commonly done looking at the 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 capitalization stocks:
    Large cap stocks have a market cap over $10 billion dollars.
  • Mid capitalization stocks:
    Mid cap stocks have a market cap between $2 billion and $10 billion dollars.
  • Small capitalization stocks:
    Small cap stocks have a market cap between $300 million and $2 billion dollars.

Style

Stocks may also be classified by "style," either 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 etc.). Common investor perceptions tend to perceive 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 1]

Table 1. Total Market Index Style Box (%)
Value Blend Growth
Large Cap LV LB LG
Mid Cap MV MB MG
Small Cap SV SB SG


Examples

These examples use the nine-box stock style box to show weightings that match the composition of the total US stock market.

Funds Morningstar
Style Box
100% Vanguard Total Stock Market Index Fund (VTSMX)

Updated 28 Sept 2017

25 24 22
6 7 7
3 3 3
100% iShares Core S&P Total U.S. Stock Market ETF (ITOT)
24 23 25
6 6 7
3 3 3
100% Schwab U.S. Broad Market ETF (SCHB)
24 23 25
6 6 7
3 3 3
81% Vanguard 500 Index Fund (VFINX)
19% Vanguard Extended Market Index Fund (VEXMX)

Updated 28 Sept 2017

25 23 22
6 7 7
3 3 3
81% Vanguard 500 Index Fund (VFINX)
4% Vanguard Mid-Cap Index Fund (VIMSX)
15% Vanguard Small-Cap Index Fund (NAESX)
23 25 24
7 7 6
3 3 3
82% Vanguard 500 Index Fund (VFINX)
18% Vanguard Small-Cap Index Fund (NAESX)
23 25 23
6 6 6
3 4 3
85% Vanguard 500 Index Fund (VFINX)
15% iShares Russell 2000 Index (IWM)
24 26 24
4 4 3
4 5 5
83% Vanguard 500 Index Fund (VFINX)
11% iShares S&P MidCap 400 Index (IJH)
6% iShares S&P SmallCap 600 Index (IJR)
24 25 24
6 6 6
3 4 3
84% Vanguard 500 Index Fund (VFINX)
16% Vanguard Tax-Managed Small-Cap Fund Inv (VTMSX)
24 26 25
4 4 3
4 5 5
87% Vanguard Large Cap Index Fund (VLACX)
13% Vanguard Small-Cap Index Fund (NAESX)
23 25 24
6 7 7
2 3 3
81% Fidelity Spartan 500 Index Fund (FUSEX)
10% Fidelity Spartan Mid Cap Index Fund (FSCLX)
9% Fidelity Spartan Small Cap Index Fund (FSSPX)
23 24 25
7 6 5
3 3 3
92% iShares Russell 1000 ETF (IWB)
8% iShares Russell 2000 ETF (IWM)[1]
23 25 25
6 6 6
3 3 3
82% John Hancock 500 Index (JEINX)
11% John Hancock Mid Cap Index (JECIX)
7% John Hancock Small Cap Index (JESIX)[2]
24 24 24
6 6 7
3 3 3
  • These percentages were computed on Nov 1, 2015, except where otherwise noted.
  • 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 VFINX at 81% and VEXMX 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.
  • Computation was done by the method of least squares
  • Investors contemplating on using an S&P MidCap 400 fund, for example, may 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.

Notes

  1. On the Callan periodic table of investment returns, that visualizes the performance of the different asset classes, one can see the alternating performance of the growth and value stocks.

See also

References

  1. See Boglehead Forum Thread for more on combining these two funds to approximate total stock market.
  2. Calculated in Morningstar X-Ray on Feb. 27, 2013. This combination is likely only of interest to investors with a 401(k) plan held at John Hancock Funds. As of November 1, 2015, these ticker symbols are no longer available in Morningstar Instant X-Ray.