Broad market index funds can be a great way to gain exposure and diversify across all listed U.S. stocks in one investment. Choosing a broad market index fund is a convenient way to invest in as many stocks as possible without the cost of buying them all individually.
Definition of Broad Market Index Fund
A broad market index fund is a mutual fund or exchange-traded fund (ETF) that invests in a selection of stocks that track the performance of a broad-based market index, such as the Wilshire 5000, the CRSP U.S. Total Market Index, the Russell 3000, or the Dow Jones U.S. Total Stock Market Index.
Like S&P 500 index funds, broad market index funds rely on market capitalization weightings, where larger-cap companies receive a larger share of the investment compared to mid- and small-cap companies.
Note: The major companies in these indices include large U.S. firms such as Apple (AAPL), Meta (FB), formerly known as Facebook, and Microsoft (MSFT).
Benefits of Investing in a Broad Market Index Fund
Here are some key benefits of investing in a broad market index fund:
Core Investment:
Broad market index funds are considered good core investments in a mutual fund portfolio. In a core and satellite portfolio strategy, you will invest in several funds, with the core funds receiving the largest allocation and the satellites receiving smaller allocations.
Simplicity:
You can get exposure to the entire U.S. stock market in one low-cost fund.
Diversity:
Broad market index funds typically hold thousands of stocks across different market capitalizations. You can achieve diversification within one fund, as most broad stock index funds hold 3,000 or more stocks.
Tax Efficiency:
Because index funds have very low turnover, they generally produce fewer capital gains distributions compared to funds that are actively managed. This makes a broad market index fund a good choice if you have a taxable brokerage account.
Best Broad Market Index Funds
Since index funds track a specific index, the best funds generally have the lowest expense ratios. This is similar to buying generic goods. If you are comparing two items with the same components, it is better to buy the cheaper one.
Note: Broad stock index funds should track an index that provides exposure to thousands of U.S. stocks.
Based on these criteria, here are some of the best broad market index funds available:
Vanguard Total Stock Market Index Admiral Shares (VTSAX):
VTSAX opened to investors in 1992 and was among the first index funds to capture the broad market. This fund tracks the CRSP U.S. Total Market Index. With an expense ratio of 0.04% and exposure to over 3,500 stocks, it serves as a strong core investment for a diversified mutual fund portfolio. You can purchase the ETF version of the fund with the same stocks and lower expense ratio of 0.04%, which is Vanguard Total Stock Market ETF (VTI).
Fidelity Total Market Index Fund (FSKAX):
With an expense ratio of just 0.015%, FSKAX currently holds the title for the lowest expense ratio among broad market index funds. This mutual fund tracks the Dow Jones U.S. Total Stock Market and represents about 3,000 U.S. stocks.
Schwab Total Stock Market Index (SWTSX):
SWTSX features a low expense ratio of 0.03% for a mutual fund. The fund also tracks the Dow Jones U.S. Total Stock Market.
iShares Russell 3000 Index Fund (IWV):
With IWV, you gain access to the Russell 3000 Index, which covers about 3,000 U.S. stocks. While the expense ratio for IWV is 0.20%, which is slightly higher than some other broad market index funds, IWV is one of the largest ETF funds of its kind, with over $12 billion in assets.
Conclusion
Index funds
The total stock market index funds are good if you are looking for a mutual fund as an independent investment or as a core investment in a diversified portfolio. However, you should keep in mind that although total stock market index funds provide broad diversification, they still carry market risks similar to other stock investments.
Frequently Asked Questions (FAQs)
What is the expense ratio?
The expense ratio measures the amount of the fund’s assets that are used for operational purposes. It reduces the returns of the fund for its shareholders, so it is important to take it into consideration when making your investment decisions. Actively managed funds have much higher expense ratios than those that are passively managed.
What is an Exchange-Traded Fund (ETF)?
An Exchange-Traded Fund (ETF) is a security that tracks a sector, index, commodity, or other assets. ETFs are traded on stock exchanges and typically have lower expense ratios because they are passively managed.
The Balance does not provide tax, investment, or financial advice. The information is presented without regard to the investment goals, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of loss of capital.
Sources
Vanguard. “Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX).” Fidelity. “Fidelity Total Market Index Fund (FSKAX).” Charles Schwab. “Schwab Total Stock Market Index Fund (SWTSX).” iShares. “iShares Russell 3000 ETF (IWV).”
Source: https://www.thebalancemoney.com/total-stock-market-index-funds-2466402
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