When most investors think about buying a “market”, they probably S&P 500 index (^gspc 0.74%)) Keep in mind. But it’s not the market – it’s a large and economically representative company selected by just 500 people. If you want to own the market, you should consider Exchange Sales Funds (ETFs). Vanguard Total Stock Market ETF (VTI) 0.65%)) or SPDR Portfolio S&P 1500 ETF (SPTM) 0.66%)). They are not interchangeable and in the end they could be even better than the S&P 500 index.
Best Ways to Buy “Market”
It is virtually impossible for most investors to go out and buy 500 shares, not to mention 1,500 or 3,598 (details in this mysteriously accurate number of seconds). Therefore, the only real option to buy the market is to buy a pooled investment vehicle, such as a mutual fund or ETF. Given the many benefits of exchange sales financing, including ultra-low cost and all-day trading, ETFs can be a go-to option.
Image source: Getty Images.
But when you’re about to buy a “market”, you really need to decide what it means. The S&P 500 Index is a good starting point, but this is a list of around 500 companies selected by the committee to represent the US economy. The stocks in this index are Vanguard S&P 500 ETF (voo 0.75%))accounting for approximately 80% of the market capitalization of all US stocks. It’s a lot of markets, but it’s not all of the markets.
The rest of the market is primarily made up of small and medium-sized businesses. However, there are some large companies that should not pass the committee process for any reason. This includes some kind of economic problems. But all of these companies are diversifying to investors who really want to own the “market.” This is where the Vanguard Total Stock Market ETF and the SPDR Portfolio S&P 1500 ETF are located.
Just expand the theme and buy everything
The SPDR Portfolio S&P 1500 ETF is essentially a cousin of the S&P 500 index. S&P 500 and in addition S&P MIDCAP 400 Index and S&P SmallCap 600 Index. Adding it all together will get around 1,500 shares, accounting for about 90% of the market capitalization of all US stocks. All three of these indices follow the same basic committee approach, but the S&P 500 is the most scrutinized.
Still, it’s not all markets. The Vanguard Total Stock Market ETF is much closer with its holdings of 3,598. That said, there is no screening process other than stocks traded on US exchanges. Similar to S&P options, Vanguard Total Stock Market ETFs are market capitalization weighting, so the largest stocks have the most impact on the performance of the ETF. However, adding these extra 2,000 pieces or stock made a huge difference in performance.
SPTM Total Revenue Price Data based on data YCHARTS.
The Vanguard Total Stock Market ETF has outperformed both the S&P 500 and S&P 1500 indexes over the long term, as highlighted by the Total Revenue Chart above. In other words, when you buy the market, all of these extra stocks seem to add value to around 20% of the overall market capitalization of the US market, all of these extra stocks have. In particular, cherry picking stocks with committees don’t seem to help much.
If you need a “market”, think about it even bigger
If you say you own the market and only own the S&P 500 index, you don’t actually own the market. If history is a guide, then owning as many markets as possible appears to have performance benefits. So, index investors probably need to take a closer look at the Vanguard Total Stock Market ETF. You may decide to stick to the S&P 500 and its committee approach, but you will need to at least see other, and perhaps more appealing options.
Reuben Gregg Brewer has no position in any of the stocks mentioned. Motley Fool has jobs and recommends the Vanguard S&P 500 ETF and the Vanguard Total Stock Market ETF. Motley Fools have a disclosure policy.
