For many investors, an important part of their overall investment portfolio is exposure to the U.S. equity market. Is this best accomplished by using a total stock market index fund or by buying a combination of several different index funds? This article addresses that issue.
One-stop shopping has gained in popularity as an investing paradigm during the last decade. Vanguard, for example, has a “one stop” offering for investors wishing to simplify their exposure to the U.S. equity market, namely the Vanguard Total Stock Market Index fund (VTSMX). This type of fund is certainly convenient, but is it the best approach?
Another approach would be to invest in separate index funds from three equity market segments based on market capitalization: large-cap, mid-cap, small-cap. For the purposes of this comparison, those three funds are Vanguard 500 Index (VFINX), Vanguard Midcap Index (VIMSX) and Vanguard Small Cap Index (NAESX). When combined, these three funds (rebalanced annually) seek to accomplish what the Total Stock Market Index is attempting to achieve.