S&P 500 index fund vs total market fund
A plain-English guide to two popular ways to own the US stock market in one fund.
By Kenny Goodrich, Founder of Money Masters MediaWhen people pick a first broad fund, the choice often comes down to two options: an S&P 500 index fund or a total US stock market fund. Both are low-cost, both hold a wide range of companies, and both are sensible building blocks. The difference is how much of the market they cover. One holds around 500 of the largest companies, the other aims to hold nearly all of them. This guide explains what each fund holds, why they tend to behave alike, the case for each, and how to choose. It builds on Index Fund Investing and What Is the S&P 500?, and pairs with the Investing 101 path.
What is an S&P 500 index fund?
An S&P 500 index fund is a fund that tracks the S&P 500, an index of around 500 of the largest companies listed in the United States. Buying one share gives you a slice of all of them at once, weighted toward the biggest names. It is the single most popular way to own the US large-company market, and there are very low-cost versions as both ETFs and mutual funds.
The index itself is explained in What Is the S&P 500?. The key point here is that it focuses on large companies and deliberately leaves out most smaller ones.
What is a total market fund?
A total stock market fund tracks an index designed to hold essentially the entire US stock market, thousands of companies across large, medium, and small sizes. In a single fund, it aims to own a little of everything rather than just the biggest names.
In practice the largest companies still make up most of its value, because a fund like this weights companies by their market capitalization. The main thing it adds over an S&P 500 fund is the layer of mid-sized and small companies underneath the giants.
Key differences
Both own a broad swath of US stocks. The difference is simply how many companies, and which sizes, are inside.
S&P 500 index fund
Tracks the S&P 500, an index of around 500 of the largest US companies. It is the most famous US benchmark, and it leans heavily toward big, established businesses.
Total market index fund
Tracks a total US stock market index, holding thousands of companies of every size, from the largest down to small ones. It aims to own essentially the whole US market.
Because the largest companies make up most of the market value, the two funds share many of the same top holdings at similar weights, so they have tended to move very much alike. The total market fund simply adds the smaller companies underneath.
The S&P 500 profile
A few traits capture what you are actually buying in an S&P 500 fund.
- Around 500 of the largest US companies, chosen to meet the index rules.
- Heavily weighted toward big, established large-cap businesses.
- Available as very low-cost ETFs and mutual funds from several providers.
- Extremely widely held, with deep trading and many fund choices.
- Leaves out most small and mid-sized US companies by design.
The total market profile
A total market fund covers the same giants plus everything beneath them.
- Thousands of US companies across large, mid, and small sizes.
- Still dominated by the largest companies, because they make up most of the market value.
- Adds the smaller companies that an S&P 500 fund leaves out.
- Also available as very low-cost ETFs and mutual funds.
- A single fund that aims to capture the entire US stock market.
Benefits of an S&P 500 fund
The biggest US companies
You own a concentrated slice of the largest, most established US businesses, the names that dominate the headlines and the economy.
Low cost and everywhere
S&P 500 funds are among the cheapest and most common investments available, with strong options at nearly every broker.
A simple, familiar core
As the best-known US benchmark, it is easy to understand and to compare against, which suits a straightforward core holding.
Benefits of a total market fund
Owns the whole US market
A single total market fund holds large, mid, and small companies together, so you are not leaving any size of company out.
Adds small and mid caps
It includes the smaller and medium companies an S&P 500 fund skips, which broadens what you own in one purchase.
Diversified across sizes
Spreading across every company size is diversification taken one step further, all inside one low-cost fund.
What to watch with both
Both are US only
Neither fund holds companies based outside the United States. For exposure to other economies you would add an international fund separately.
Both are all stocks
Each is fully invested in stocks, so both fall when the US stock market falls. Neither includes bonds or cash to soften the ride.
Holding both is mostly redundant
Because they overlap so heavily, owning both is largely double-counting the same big companies rather than adding real diversification.
Both are fully invested in US stocks, so both fall when the market falls, which is the risk and reward tradeoff at work. Real added diversification usually comes from holding other things, like international stocks or bonds, not from owning both of these at once.
How to choose between them
For most people, either fund can serve as a solid US stock core, and the decision is not as weighty as it can feel. If you want the simplest, most recognizable benchmark, an S&P 500 fund fits. If you would rather own the entire US market in one holding, including smaller companies, a total market fund fits. Both are low cost and broadly diversified.
What usually matters more is what you build around your choice. Since both are US stocks only, broader diversification tends to come from adding international stocks or bonds, a question of asset allocation rather than which of these two you pick. And remember that each can be bought as an ETF or a mutual fund, so that is a separate decision again.
Frequently asked questions
What is the difference between an S&P 500 index fund and a total market fund?
An S&P 500 index fund holds around 500 of the largest US companies, while a total stock market fund aims to hold essentially every US company across large, mid, and small sizes. The total market fund adds the smaller companies that an S&P 500 fund leaves out. Both are broad, low-cost ways to own US stocks.
Why do an S&P 500 fund and a total market fund behave so similarly?
Both weight companies by their market capitalization, so the largest companies make up most of each fund. Because those giants are shared at similar weights, the two funds hold many of the same top names and have tended to move very much alike. The smaller companies in a total market fund make up a modest share of its value.
Should I own both an S&P 500 fund and a total market fund?
Holding both is mostly redundant, since they overlap so heavily that owning both largely double-counts the same big companies. Most people pick one as their US stock core. Real added diversification usually comes from holding other things, such as international stocks or bonds, rather than both of these at once.
Do these funds include international stocks or bonds?
No. Both an S&P 500 fund and a total US market fund hold US stocks only, with no international companies, bonds, or cash. To add exposure to other economies or steadier assets, you would hold a separate international stock fund or bond fund alongside your US core.
Can I buy these funds as an ETF or a mutual fund?
Yes. Both an S&P 500 index and a total US market index are widely available as very low-cost ETFs and as mutual funds from several providers. The wrapper is a separate decision from which index you choose, and it mainly affects how you trade rather than what the fund holds.
How this connects to Money Masters tools
Choosing a broad fund is really about how much of the market you want to own and at what cost. These free Money Masters tools and guides explain those pieces in plain English. Start with the Dashboard to see markets and the economy on one screen.
Both own the market, just differently
An S&P 500 fund and a total market fund are two routes to a broad US core, and either can anchor a simple portfolio. These free tools and guides explain the market, funds, and the economy together, with no jargon and no hype.
Educational content only: This guide is for education and general information, not financial, investment, or tax advice, and not a recommendation to buy or sell any security, fund, or index. Index funds carry risk, including the possible loss of money you put in, and neither fund guarantees any return. Holdings, fees, and index methodology vary by fund, so always check a fund prospectus and consider speaking with a licensed financial professional before making decisions.
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