U.S. investors: Total Stock Market or S&P 500?

What are the two options for investors?

Most readers are probably very familiar with the S&P 500, a market-capitalization weighted index of the 500 largest publicly traded U.S. companies. Over time, the S&P 500 has evolved into a benchmark for professional fund managers and retail investors to compete against. ETFs tracking the S&P 500 are highly popular, with trillions in assets under management, high liquidity, and minimal bid-ask spreads. 

The U.S. stock market doesn't end at just the S&P 500, though. There are still another 3,000+ mid and small-cap stocks floating around. Combining the S&P 500 and these 3000+ other stocks gives us the CRSP US Total Market Index. By weight, around 80% of this is the S&P 500, with around 15% mid-caps and 5% small-caps. The CRSP is still heavily influenced by the S&P 500, given the large overlap of commonly held large-cap stocks between them.

Conveniently, Vanguard offers two low-cost ETFs for tracking these indexes:

• Vanguard S&P 500 ETF (
  VOO
  ): 0.03% expense ratio.
• Vanguard Total Stock Market ETF (
  VTI
  ): 0.03% expense ratio. 

What's the difference between the S&P 500 and Total U.S. Stock Market?

Very little actually, unless you want to get very technical and detailed. For the average retail investor, their performance is indistinguishable at first glance. Take a look at the following back tests from 1992 to the present:

Because VTI holds 80% VOO, the two funds have a very high correlation. As of writing, it's around 0.99 measured monthly over various rolling 5-, 10-, and 20-year periods. The discernable difference here is slightly higher volatility and returns from VTI due to the inclusion of some mid and small-cap stocks. Overall risk-adjusted returns (Sharpe ratio), CAGR, volatility, and drawdowns remain nearly identical. Notice how both indexes take turns outperforming – this is due to the cyclical nature of small vs large-cap stocks. 

VOO vs. VTI: which one is ideal?

Honestly, it's a coin toss here. It depends on your outlook for small vs large-cap stocks. Buffett was famously bullish on downtrodden U.S. large cap stocks as a value investor and selected VOO as the investment of choice for his estate. John Bogle favoured VTI, telling investors to "buy the haystack."

Over long periods of time, VTI and VOO will likely perform virtually identically, barring some small intra-year tracking error. The minimal amount of small and mid-caps in VTI is unlikely to differentiate it much from VOO in the long run. From a strict diversification perspective, VTI is broader and holds more stocks, but takes on very slightly higher volatility for a tiny bit more return.

A great alternative is using both as tax-loss harvesting pairs, given their high correlation and similar holdings, yet different underlying indexes. If you're not familiar with tax-loss harvesting, I suggest giving this article a read.