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.