My employer informed us our 401k plan added a new index fund to the lineup. It used to have only an S&P 500 index fund. Now it added Fidelity’s Spartan Extended Market Index Fund.
100% of my money in the 401k plan is in the S&P 500 fund because it was the only index fund in the plan until this recent change. Now I’d like to move some of my money to this new fund to make my 401k holdings mimic the entire U.S. stock market (I have bonds and other investments elsewhere).
How much should I move?
The Spartan Extended Market Index Fund tracks the Dow Jones U.S. Completion Total Stock Market Index. This completion index tracks the total U.S. stock market minus what’s already in S&P 500. Therefore if I mix the S&P 500 fund with the extended market fund, I will get the total US stock market.
It shouldn’t be 50:50. Although there are only 500 stocks in the S&P 500 and there are more than 3,000 stocks in the extended market index, the 500 stocks in S&P 500 are large company stocks. Those 500 large company stocks make up a much larger part of the market than the large number of smaller company stocks. That’s why the S&P 500 index is often used as the benchmark for the US stock market. They are not quite the entire market, but the bulk of it.
The information page for the Dow Jones U.S. Completion Total Stock Market Index (click on the Characteristics tab) says the index had 3,256 constituents. The mean market capitalization was $1.793 billion. Multiplying the two numbers together means the values of all the stocks in the index added up to $5,837 billion.
The similar information page for the S&P 500 shows the index had 505 constituents with a mean capitalization of $50.11 billion. Multiplying the two numbers again means the values of all the stocks in the S&P 500 index added up to $25,307 billion. Altogether, S&P 500 made up 25,307 / (25,307 + 5,837) = 81% of the total market. For simplicity I call it 80%.
I’m moving 20% of my money in the S&P 500 fund to the extended market fund. I’m also changing the allocation for future contributions to 80% to the S&P 500 fund and 20% to the extended market fund.
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Too bad they don’t just offer a total market solution so you don’t have to play games (or do math!).
My wife’s 401k has more or less the same options – a bunch of active funds, then Vanguard’s Institutional version of the S&P 500 (VINIX) and the same Extended Markets fund from Fidelity. I chose the same 80/20 ratio for her entire 401k. I then use my 401k, my rollover IRA, and our 2 ROTH IRA’s to round out our total asset allocation.
I was able to convince my 401k company to offer a total stock index, a total international index, and a total bond index (they provide Fidelity versions), and then they also offer a large number of “recommended” active funds. I was happy to at least get the total market in index funds.
I have 100% of my 401 in the S&P index, but at what age do you start moving part of your current balance and future contributions to bonds to limit your exposure. Is there a rule of thumb? Do you move a % based off of the number of years from retirement?
Harry Sit says
@Scott – I go by John Bogle’s “age in bonds” rule. It says if you are 30, you put 30% in bonds. When you are 40, you put 40% in bonds. I have bonds in other accounts, just not in the 401k because the plan doesn’t have a good bond fund option.
for those of us who like to tilt towards small and away from large
going 50/50 with the spartan extedned and s&p 500 is simpler and achieves the tilt!
Harry Sit says
@enonymous – The extended market fund is dominated by mid-caps, in a similar way the total market is dominated by S&P 500. I prefer to make it total market and then add extra dose of small caps.
I agree with TFB, I prefer to add small cap (value) separately. I used Vanguard’s Small Cap Value Index fund in my ROTH IRA. I’m sure there are “smaller” or more “value-y” options, but this works for me.
Up until January 1st, the only index fund in my 401(k) at Vanguard (!) was VFINX. Thankfully this year we also have VBMFX (Total Bond Market Index fund) and VGTSX (Total International Stock Index fund). We only have active small-cap funds and no total stock market fund, so I keep the small-cap index in my Roth IRA and allocate accordingly across 401(k), Roth IRA, and taxable accounts.
TFB – Thanks for the insightful article. However, I side with Enonymous on the weighting debate (I respectfully disagree with you and Thad). Per Morningstar, the Spartan extended market fund (FSEMX) contains 49% midcaps and 46% small/micro. It’s not “dominated” by midcaps the way the total market is by the S&P 500 (80% according to your analysis).
I also respectfully question Thad’s practice of adding Vanguard Small Cap Value (VISVX or VBR), which is comprised of 23% midcaps – if the purpose is to add value small caps “separately.” A replacement consideration for someone with that focus might be iShares S&P small cap 600 value (IJS) or iShares Russell 2000 value (IWN), which contain 96% and 92% small/micro caps, respectively.
In my 401k, I apply the same 50/50 allocation to domestic equities as Enonymous. I have Vanguard’s institutional 500 index (VIIIX) and extended market index (VIEIX). Based on their underlying holdings, that translates to a mix of:
That slant suits my taste.
it is one of the best educational side 0–just fantastic
you should start charging some money from now on –i am sure you do real soon
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