Vanguard's Total Stock Market Index vs. 500 Index Funds: An Overview

Two of the investment company Vanguard's most popular products are the Vanguard Total Stock Market Index Fund and the Vanguard 500 Index Fund. While both can function as suitable core holdings in a stock portfolio, the similar-sounding mutual funds pursue different investment strategies. As its name implies, the Total Stock Market Index Fund provides exposure to the entire U.S. equities market, as represented by the Center for Research in Securities Prices (CRSP) U.S. Total Market Index of over 3,550 stocks, whereas the 500 Index Fund only provides exposure to 500 of the largest U.S. companies, similar to the S&P 500 Index.

Vanguard Total Stock Market Index Fund

The Vanguard Total Stock Market Index Fund (VTSAX) provides diversified exposure to small-, mid-, and large-cap growth and value stocks, traded on the Nasdaq and New York Stock Exchange (NYSE).

Created on April 26, 1992, the mutual fund has achieved an average annual return of 9.74% since its inception (as of April 30, 2019). The fund's Admiral Shares—the only ones currently available to new investors—have returned 6.87% annually since their inception on Nov. 13, 2000. This return is almost identical to that of the fund's benchmark, the CRSP U.S. Total Market Index. The fund employs a representative sampling approach to approximate the entire index and its key characteristics.

As of April 30, 2019, the fund held 3,607 stocks and controlled net assets of $804.6 billion. Technology, financial, industrial, health care, and consumer service companies make up its largest holdings. VTSAX charges an extremely low expense ratio of 0.04% and requires a minimum investment of $3,000.

Both the Vanguard Total Stock Market Index and the Vanguard 500 Index mutual funds are also available as exchange-traded funds (ETFs).

Vanguard 500 Index Fund

The first index fund for individual investors, according to the company, the Vanguard 500 Index Fund (VFIAX) provides exposure to a subset of the entire U.S. equity market—specifically, the Standard & Poor's 500 Index, whose component companies account for about three-fourths of the U.S. stock market’s value. The Vanguard 500 Index Fund seeks to replicate its benchmark index by investing its total net assets in the stocks comprising the index and holding each component with approximately the same weight as the index. In this way, the fund barely deviates from the S&P, which it is designed to mimic. 

The fund was issued on Aug. 31, 1976; as of April 30, 2019, it has generated an average annual return of 11.07%. The fund's Admiral Shares—the only ones currently available to new investors—have returned 6.37% annually since their inception on Nov. 13, 2000, only slightly less than the S&P 500.

The Vanguard 500 Index Fund has $479.7 billion in total net assets and, despite its name, holds 508 stocks. Like its sister fund, VFIAX charges an expense ratio of 0.04% and requires a minimum investment of $3,000.

Key Takeaways

  • Though both are broad-based equity mutual funds, the Vanguard Total Stock Market Index Fund and the Vanguard 500 Index Fund have different investment objectives.
  • The Vanguard Total Stock Market Index Fund invests in the entire U.S. equities market.
  • The Vanguard 500 Index Fund invests solely in the 500 largest U.S. companies.
  • The Vanguard Total Stock Market Index Fund could represent all of a portfolio's equity holdings, while the Vanguard 500 Index Fund should ideally be counterbalanced with aggressive growth stocks.

Key Differences

In comparison to the Vanguard Total Stock Market Index Fund (Admiral Shares), the Vanguard 500 Index Fund (Admiral Shares) has historically experienced slightly lower volatility and return. However, the Sharpe ratios (the most widely used method for calculating risk-adjusted return) are nearly identical, which indicates that investors in both funds had similar returns on a risk-adjusted basis.

The Vanguard Total Stock Market Index Fund is best suited for moderately to highly risk-tolerant investors seeking low-cost exposure to the U.S. stock market. Additionally, it could function as a single domestic equity fund in a portfolio. 

Meanwhile, the Vanguard 500 Index Fund is suitable as a core equity holding for investors with a long-term investment horizon and a preference for the lower risk of the large-cap equity market. Since it does concentrate on more conservative, large-cap stocks, the fund might work best in a diversified portfolio that contains exposure to other types of equities for growth.