Recently, I penned an article titled “The Case against S&P 500 Index Funds,” highlighting a couple of shortcomings of this popular investment vehicle and suggesting the Total US index fund as a potentially superior alternative. Shortly after publication, I received a handwritten note from none other than John C. Bogle, the visionary behind both of these index fund concepts, granting me permission to share his insightful feedback.
Hi Allan!
Of course you are right about these two flaws in the S&P 500, and I agree with your conclusion about “a better way.”
But we’re left to explain why, over history from 1928 on, the annual return in the S&P 500 has been 10.4 percent while the return on the Total Stock Market has been 10.2 percent (see the Little Book of Common Sense Investing).
Food for thought.
Best,
Jack
Receiving a note directly from Jack Bogle, a figure revered by “Bogleheads” and the wider investment community, was indeed a thrill. His point regarding the S&P 500’s slightly higher historical return (0.2% annually since 1928) compared to the total U.S. stock market is compelling. Nathan Hale, another contributor to MoneyWatch, has also noted this intriguing phenomenon. This observation certainly warrants further examination, prompting me to delve deeper into the nuances of these two investment strategies, particularly in the context of exchanges like the NYSE (New York Stock Exchange), and conduct an “Nyse C Compare” – a comparison focusing on companies listed on the NYSE and how they are represented in these indices.
A Look into the Historical Data of the S&P 500
While Mr. Bogle’s figures on the S&P 500’s historical performance since 1928 are undoubtedly authoritative and unbiased, it’s crucial to acknowledge the inherent limitations in data accuracy stretching back nearly a century. Furthermore, the composition of the S&P index itself has undergone significant transformations over time.
Back in 1928, the S&P index was a far cry from its modern form, encompassing merely 90 companies. It wasn’t until 1957 that it expanded to its now-familiar 500-company benchmark. Therefore, comparing the performance of a contemporary total stock market index against historical S&P data, which reflects a vastly different and much smaller set of companies during a significant portion of that period, might introduce certain distortions and unintended biases into the analysis. The landscape of companies listed on exchanges like the NYSE has also evolved dramatically, making a direct “nyse c compare” across such a long timeframe complex.
Performance Analysis: S&P 500 vs. Total Stock Market Funds
As with any statistical comparison, selecting specific timeframes can skew the results to support a pre-determined narrative. To provide a more balanced perspective, I opted to compare the actual performance of readily available funds tracking these indices from a period when both existed concurrently. The Vanguard Total Stock Market Index fund (VTSMX) commenced operations on April 27, 1992. Analyzing its performance up to January 15, 2010, reveals an average annual return of 8.10 percent. In contrast, the Vanguard S&P 500 Index fund (VFINX) yielded an average annual return of 7.98 percent over the identical period.
This difference of 0.12 percent annually is statistically insignificant and hardly conclusive evidence of the Total Stock Market Fund’s consistent outperformance. Market dynamics are constantly shifting. For instance, if small-capitalization stocks were to underperform significantly relative to large-cap stocks in a given year, the marginal advantage observed in the Total Stock Market Fund could easily reverse. Therefore, while the “nyse c compare” might show slight variations based on market capitalization segments represented in each index on the NYSE, the overall performance difference remains minimal.
Bogle’s Wisdom: A Balanced Perspective
It’s plausible that John Bogle introduced the Total Stock Market Index Fund driven by his belief in its inherent superiority as an investment vehicle compared to solely focusing on the 500 largest U.S. companies. The total market approach offers investors broader diversification across the entire spectrum of publicly traded companies and typically exhibits lower portfolio turnover. This reduced turnover stems from the fact that total market index funds aren’t subjected to frequent trading adjustments triggered by changes in the S&P 500 index composition determined by Standard and Poor’s.
However, Bogle also astutely acknowledges that proclaiming the definitive outperformance of a total stock market fund over an S&P 500 fund is far from certain. In reality, the performance differential between these two fund types is unlikely to be substantial, primarily because the S&P 500 constitutes a significant portion – approximately 80 percent – of the total U.S. stock market capitalization. Thus, any “nyse c compare” focusing on the largest NYSE-listed companies will naturally show considerable overlap between these indices.
Concluding Thoughts on Index Fund Choices
The S&P 500 index fund remains an exceptional instrument for investors seeking to capture the returns generated by the dynamism of capitalism. In fact, it arguably surpasses the vast majority – perhaps 99.9 percent – of actively managed mutual funds available in the market. A total stock market fund, however, represents a marginal enhancement, offering slightly more comprehensive market exposure.
While I might lean towards predicting a modest outperformance of the total stock market fund over the S&P 500 in the upcoming decade, I recognize a considerable probability – approaching 50 percent – of being incorrect in that projection. Nevertheless, I anticipate that the magnitude of any performance disparity between the two will be minimal.
Crucially, both the S&P 500 and Total Stock Market index funds stand as invaluable tools for investors to participate in the growth of U.S.-based companies. My sincere gratitude extends to Mr. Bogle for pioneering these accessible and efficient investment solutions.
Prologue: Jack Bogle on the Rationale Behind the Total Stock Market Index Fund
In a recent interview coinciding with the 10th anniversary edition of his seminal work, “Common Sense on Mutual Funds,” I had the opportunity to discuss the nuances of the Total Stock Market Index Fund versus the S&P 500 with Jack Bogle. Mr. Bogle emphasized that the debate over which fund might marginally outperform the other pales in comparison to the fundamental distinction between broad, low-cost index funds and actively managed funds that often prioritize speculation over long-term investment principles. This perspective resonates deeply with my own investment philosophy.
Expanding on this, in a speech delivered to the Investment Analysts Society of Chicago on October 26, 2000, Jack Bogle articulated the genesis of the Total Stock Market Index Fund:
“We formed the first S&P 500 Index fund in 1975, and then in 1987 pioneered the completion (“Extended Market”) index fund, tracking the small- and mid-cap stocks unrepresented in the S&P 500. The idea: To enable investors to make a commitment to the entire stock market, which I consider as the full fruition of the index fund concept. But adjustment of stocks between the two index funds was required as stocks moved in and out of the 500, creating portfolio turnover and potential tax-inefficiencies. So, in 1992 we created the all-in-one Total (U.S.) Stock Market Index Fund.”
This historical context further clarifies the evolution of index fund investing and underscores the rationale behind offering investors diversified exposure to the entire U.S. stock market, encompassing companies listed across various exchanges, including but not limited to the NYSE.
