What Is a Total Stock Fund?

A total stock fund is a mutual fund or an exchange traded fund that holds every stock in a selected market. A total stock fund seeks to replicate the broad market by holding the stock of every security that trades on a certain exchange, invests in a certain country, or passes basic thresholds of size, or trading volume. Total stock funds are ideal for investors who want exposure to the overall equity market at a low cost.

Key Takeaways

  • A total stock fund seeks to replicate the broad market by holding the stock of every security that trades on a certain exchange.
  • A total stock fund is a mutual fund or exchange traded fund that is designed to mirror an index or the overall equity market.
  • Total stock funds are super-broad index funds, which can have less volatility since they hold hundreds of stocks.

How Total Stock Funds Work

Total stock funds are also called total stock market index funds or total market funds. These funds are designed to track a broad index such as the Wilshire 5000 or Russell 2000. Investors can't buy shares of an index directly since the index is merely a representation or measure of the market. Instead, some mutual funds and exchange traded funds (ETFs) are designed to mirror the investments within a particular index.

Diversification

A total stock fund that's linked to an index—called a benchmark—is designed to mirror the equities within the underlying index. A total market fund's portfolio is typically diversified since it includes the stocks of many types of companies from large, established corporations, mid-sized, and smaller companies.

Passively Managed

Total market funds are passive investments, meaning there is little buying and selling of stocks within a fund's portfolio. Conversely, an actively managed fund would typically involve a portfolio manager or an investment manager buying and selling stocks to generate an investment return that beats the overall equity market.

Investment Strategy

Total stock funds allow access to the overall equity market, which includes several sectors or industries. Total stock funds are often used as part of a buy-and-hold investment strategy, which usually aligns with investors looking for long-term gains.

Total stock funds can also be used in tandem with buying individual stocks. For example, an investor can buy into a total market fund gaining broad exposure to the equity market while simultaneously investing in individual stocks of best-of-breed companies within specific sectors.

Benefits of Total Stock Funds

These super-broad index funds tend to have less volatility—or price fluctuations—than even large indices like the S&P 500 because they hold so many companies' stock. As a result, total stock market funds can help reduce an investor's risk of losing all of their money.

For example, if an investor bought an equal amount in the stock of two companies and one of the companies failed, 50% of the investment principal would be lost. Conversely, the investment dollars within a total market fund are spread out across hundreds or thousands of stocks, meaning if one company fails, most of the principal invested would not be lost.

Since total stock funds are passively managed, they tend to have lower fees or expense ratios. Passive funds usually mirror the underlying index and without a portfolio manager actively buying and selling equity shares, there are lower fees associated with total stock funds.

Total stock funds also offer transparency, meaning investors know which stocks they own since the fund mirrors the underlying index.

Market-Cap Weightings

Mutual funds and index funds can be organized in many different ways. Perhaps the most common way is by market cap, which is short for market capitalization. Market capitalization refers to the value of a company's outstanding shares of stock. Market cap is calculated by multiplying the total number of a company's outstanding shares by the current market price of one share.

A company with many shares outstanding and a high stock price would have a large market cap while a smaller company with fewer shares outstanding and a lower stock price would have a smaller market cap. Typically, large, well-established companies have a higher market cap than mid-cap or small-cap companies.

Large-cap funds typically invest in companies with a total market capitalization of $10 billion or more. Investments in individual companies are not even, with larger companies receiving more investment dollars. Mid-cap funds typically invest in companies with a total market capitalization between $2 billion and $10 billion.

Total stock funds may have portfolio weightings based in some way on market cap, but they are not necessarily solely market-cap weighted. Small-cap funds typically invest in companies with a total market capitalization of less than $2 billion. Some mutual fund companies even offer micro-cap funds, which invest in companies with a total market capitalization of less than $50 million.

Please note that not all index funds match every stock of the underlying index being tracked and some may contain additional investments, stocks, or securities.

Example of a Total Stock Fund

One of the largest and oldest total stock funds is the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), which has approximately $1.2 trillion in assets under management. As of March 31, 2021, the VTSAX owns more than 3,500 of the largest companies that trade on the New York Stock Exchange (NYSE) and Nasdaq. As of April 30, 2021, Vanguard's VTSAX had a 10-year annualized return of 14.02%.

For those who can't afford the $3,000 initial investment required for the VTSAX, Vanguard also offers an exchange traded fund (ETF) called the Vanguard Total Stock Market ETF (VTI). The ETF version is similar to the VTSAX and costs the price of one share.

There are other total market index funds available including from Schwab and BlackRock Inc.