The Vanguard Total Stock Market Index Fund Investor Shares and the Vanguard 500 Index Fund Investor Shares are both suitable core holdings in a stock portfolio, and despite their similar names perform quite differing functions. The Vanguard Total Stock Market Index Fund provides exposure to the entire U.S. stock market, whereas the Vanguard 500 Index Fund only provides exposure to 500 of the largest U.S. companies, similar to the functioning of the S&P 500 "benchmark" index.
Vanguard Total Stock Market Index Fund
The Vanguard Total Stock Market Index Fund (VTSMX) provides diversified exposure to micro-, small-, mid- and large-cap stocks traded on the NASDAQ and New York Stock Exchange (NYSE). The mutual fund was issued on April 26, 1992, and, as of October 18, 2018, achieved an average annual return of 11.17% since its inception. The fund charges an expense ratio of 0.14%, which is 87% lower than the average expense ratio of mutual funds with similar investments. A minimum investment of $3,000 is required to invest in this fund.
To provide exposure to the entire U.S. equity market, the Vanguard Total Stock Market Index Fund implements an indexing strategy and tracks the performance of the CRSP U.S. Total Market Index, its underlying index. The fund employs a representative sampling approach to approximate the entire index and its key characteristics. As of October 2018, the fund holds 3,680 stocks and controls net assets of $756.59 billion.
Vanguard 500 Index Fund
Contrary to the Vanguard Total Stock Market Index Fund, the Vanguard 500 Index Fund (VFINX) provides exposure to a subset of the entire U.S. equity market. The Vanguard 500 Index Fund seeks to track the general price and yield performance of the Standard & Poor's 500 Index. Unlike the Vanguard Total Stock Market Index Fund, 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 October 18, 2018, it has generated an average annual return of 11.14% over the same 25-year period as the Vanguard Total Stock Market Index Fund, which returned 11.17%. The Vanguard 500 Index Fund has $459.3 billion in total net assets. In comparison to the Vanguard Total Stock Market Index Fund, the Vanguard 500 Index Fund experienced a slightly lower volatility and return over the aforementioned 25-year period. However, the Sharpe ratios are nearly identical, which indicates that investors had similar returns on a risk-adjusted basis.
The Bottom Line for Investors
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, the fund is suitable as a core equity holding in a diversified portfolio of assets, or it may be used 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 seeking diversified exposure within the large-cap equity market. Contrary to the Vanguard Total Stock Market Index Fund, which provides total U.S. equity market exposure, the Vanguard 500 Index Fund should be held in a diversified portfolio due to its specialized exposure.