S&P500 or Total Market

Summary of S&P500 or Total Market

by DIY Money

14m•March 2, 2026
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Overview of S&P500 or Total Market (DIY Money)

This episode of the DIY Money podcast answers a listener question about the difference between an S&P 500 index fund and a Total Market index fund, and whether one is preferable. The hosts explain what each fund tracks, why their long‑term performance is very similar, and the practical factors (fees, fund vehicle, taxes, and diversification) that should guide your choice.

Key takeaways

  • S&P 500: tracks ~500 largest U.S. publicly traded companies; market‑cap weighted; heavier exposure to the biggest companies (often tech).
  • Total Market: tracks several thousand U.S. stocks (Wilshire 5000 / similar total‑market benchmark); also market‑cap weighted and therefore often very similar in performance to the S&P 500.
  • Historical returns of both types of funds are nearly identical because the largest companies dominate both indexes’ weightings.
  • The real differences that matter: expense ratios (fees), mutual fund vs ETF structure (tax implications), and how the fund fits into your broader diversification strategy.
  • Practical rule: choose the cheapest, appropriate vehicle for your situation and account type, and focus on staying invested long term.

What the S&P 500 is (concise)

  • Composition: ~500 of the largest U.S. companies across sectors.
  • Weighting: market‑cap weighted, so the largest companies (e.g., Microsoft, NVIDIA, Alphabet) have outsized influence.
  • Outcome: can produce concentration in sectors (recently tech).

What “Total Market” means (concise)

  • Composition: thousands of U.S. stocks across sizes (large, mid, small caps) — commonly tracked by funds benchmarking Wilshire or similar indices.
  • Weighting: also market‑cap weighted, so the largest companies still strongly influence performance.
  • Outcome: broader coverage, but because of market‑cap weighting, it often behaves very similarly to the S&P 500.

Why returns are so similar

  • Market‑cap weighting causes the largest companies to dominate both indexes’ returns.
  • Example from the episode: NVIDIA’s weight is ~7.3% in the S&P 500 and ~6.6% in a total market fund — close enough to keep the overall performance nearly identical.
  • Analogy used: big companies are like heavy kettlebells on a trampoline — their movements drive most of the index changes regardless of how many small weights are also present.

Practical differences that should guide your choice

  • Fees/expense ratios: the most important measurable difference. Lower fees = higher net returns over time.
    • Example: Fidelity offers a no‑expense‑ratio total market fund (mentioned as a low‑cost option).
  • Fund vehicle & tax treatment:
    • ETFs are generally more tax‑efficient in brokerage accounts.
    • Mutual funds may issue capital‑gains distributions (taxable in a brokerage account).
  • Account type matters: retirement accounts (IRA/401k) hide capital‑gains distributions, so tax considerations differ.
  • Diversification needs:
    • For many investors, S&P 500 or Total Market is fine as a core holding.
    • For smoothing sector rotations or reducing concentration risk, consider adding international, emerging markets, small/mid caps, or target‑date funds.

Recommendations (practical next steps)

  • Compare expense ratios of the specific funds/ETFs you’re considering.
  • Choose the cheaper vehicle for your account type (ETF vs mutual fund) and consider tax implications.
  • If you want simplicity and full U.S. market exposure, a low‑cost Total Market fund or S&P 500 fund works well.
  • If you’re concerned about concentration or want smoother performance across market cycles, diversify with international and smaller‑cap exposures or use a target‑date fund.
  • Stay long term: consistent investing over time matters more than trying to pick between these two similar index options.

Notable quotes and listener takeaways

  • “The days are long. The years are short.” — reminder to act on long‑term financial goals now.
  • “The secret to wealth is pretty simple: Live on less than you make. Invest the rest.”
  • Analogy: big companies are kettlebells on a trampoline — they drive index movements.

Housekeeping & how to engage

  • Send voice questions (≤60 seconds) to podcast@DIYMoney.org to have them aired — $25 Amazon gift card offered for submitted questions they use.
  • Follow DIY Money on Instagram and TikTok; rate and review the podcast to help it grow.

Quick summary (one‑line)

S&P 500 and Total Market funds are both solid, market‑cap‑weighted ways to own the U.S. stock market; pick the fund/vehicle with the lowest fees and the right tax treatment for your account, and worry less about the nominal difference between the two.