Gary Karz, CFA (email)
Host of InvestorHome
Principal, Proficient Investment Management, LLC
When people in the investment business discuss stocks, they often refer to indexes and historical data based on those indexes. Historically the most recognized index is the Dow Jones Industrial Average (DJIA), which represents 30 of the largest US firms. In recent decades, the broader S&P 500 became a commonly referenced benchmark. The first index mutual fund was an S&P fund (VFINX), and it has historically been the most popular for index funds. While it is much broader than the DJIA, the S&P 500 is still not a complete US market index. The Russell 3000 takes another step toward reflecting the complete market, but still leaves out a significant number of smaller stocks. Complete US market indexes and index funds have since been developed and arguably a representative broad market index should be the primary index for benchmarking the US Stock Market.
The "Wilshire 5000" best represents the US total equity market, and actually pre-dated the RU3000. It includes all U.S. equities with readily available prices (bulletin-board and thinly traded issues are excluded because in general they do not have readily available prices). The Wilshire 5000 was created in the mid 70's at Wilshire Associates (and back dated to 1970). It was originally called the O'Brien 5000 (named after John O'Brien, who sold out to Tito according to Justin Fox in The Myth of the Rational Market). The actual number of stocks in the index fluctuates based on the number of stocks listed on the exchanges. The index originally started out with roughly 4950 stocks, with the number going much higher during the internet boom, and has since shrunk back to 4,049 as of 4/30/10.
Dennis Tito originated the idea, along with Larry Cuneo (who wrote the code for the index calculations - initially done weekly and monthly) and Wayne Wagner (who promoted it and named it with Tito). The first actual Wilshire 5000 fund was created in the mid 1980's by Wilshire for the Minnesota State Board of Investments. That fund was $1,300,000,000 - believed to be the largest first account ever as of that time. For a more detailed description of the story see The Incredible Story of Transactions Cost Management: A Personal Recollection by Wayne Wagner in the Summer 2008 issue of The Journal of Trading (or here via Scribd.com). Mark Edwards worked at the Minnesota Board at the time and Wagner, Cuneo, and Edwards later combined at Plexus Group which pioneered the Best Execution and Transactions Costs Analysis industry (where I joined them in 1998).
Some of the issues for investors to consider in evaluating the S&P 500 and Wilshire 5000 include the following.
- The 500 typically represents large capitalization stocks and while that represents a majority of the US market it excludes smaller capitalization firms. The 5000 includes all capitalizations and thus has more industry and market capitalization diversification.
- Many believe that returns for smaller capitalization stocks (see The Size Effect) have been, and arguably should be higher than large cap stocks (for example, see DFA's
philosophy). But smaller capitalization stocks tend to have wider spreads, trade less frequently (so last trade prices may not be achievable), and are much more difficult to trade in larger size without pushing prices.
- The 500 is subject to rebalances whenever stocks move between the 500 and 4500 (other US stocks not in the 500). As a result, the 5000 tends to have lower turnover (and expectedly lower transactions costs). Therefore the 5000 tends to have greater tax efficiency, which is particularly relevant to taxable investors.
- Traders have long attempted to game the additions to the 500 in advance, resulting in possible slippage for the index. See for instance Index Changes and Losses to Investors in S&P 500 and Russell index funds from Vijay Singal,
Honghui Chen and
Greg Noronha in the July/August 2006 edition of the Financial Analysts Journal.
One of the best discussions comparing the Wilshire 5000 and the S&P 500 is in John Bogle's Little Book of Common Sense Investing. Bogle notes that the W5000 "is the best measure of the aggregate value of stocks, and therefore a superb measure of the returns earned in U.S. stocks by all investors as a group." Bogle compares the S&P 500 and total market returns back to 1926 using data from the Center for Research in Security Prices (CRSP). He concludes that for the full period the S&P500 return was 10.4% versus 10.2% for the Total Stock Market Index. Starting from 1930 both returned 9.9%, and recently (from 1998-2006) the Total Market Index outperformed the 500 by 1%.
While there are style boxes (value/core/growth and market cap segments) and other criteria for benchmarking specific styles of equity investing, as the broadest market index, the W5000 represents the core benchmark for US Equities. The decision to invest in specific stocks, or sectors, or styles in an attempt to beat the broad benchmark presents a tradeoff between costs (which investors tend to underestimate) and probability of success (which investors tend to overestimate).
In the past, one reason other indexes were cited more frequently was access to pricing, particularly intra-day. That's not an issue with the W5000 anymore. On the internet you can access W5000 prices during the trading day via Yahoo (Current Quote on Wilshire 5000) and other financial platforms including Bloomberg.
There are other broad market indexes, in fact, the three major broad market index funds (from Vanguard, Fidelity, and TRowePrice - details below) each use different indexes. There are some potentially significant differences (like country of incorporation or minimum stock prices used for determining which stocks are included), but for the most part the indexes and funds have very high correlations. Funds based on the different broad indexes may also use slightly different techniques to invest in a representative sample of the index. Wilshire doesn't claim that the W5000 represents the complete US market, but the other broad indexes tend to compare themselves to the Wilshire 5000 which is assumed to represent 100% of the market.
Vanguard switched their benchmarking on their total market funds from the W5000 to the Morgan Stanley Capital International(MSCI®) US Broad Market Index, which supposedly represents 99.5% or more of the total market capitalization of all the U.S. common stocks. Fidelity's Total Market Fund uses the Dow Jones U.S. Total Stock Market Index, while TRowePrice's POMIX uses the S&P Total Market Index to represent the total market.
In April of 2000, Vanguard's S&P 500 index fund (VFINX) became the largest mutual fund when it passed Fidelity's Magellan. Currently, American Funds Growth Fund of America (AGTHX) is the largest fund (although the ETF SPY is listed higher in some rankings), but it may only be a matter of time before a Broad market index fund becomes the largest. Vanguard's VTSMX is closing in on that title, but Vanguard has multiple classes of funds, so it's not as straightforward in terms of largest funds.
Several financial media organizations regularly publish largest fund lists (based on end of moth assets). For instance here are the largest funds via the Wall Street Journal (as of 3/31/10). They list AGTHX with $67 Billion versus $63 Billion for VTSMX (VTSAX - Vanguard's Admiral class total market fund has another $26 Billlion). Kiplingers Personal Finance Magazine ranks the 20 largest stock mutual funds listed with assets (in the footnotes) "For all share classes combined" and the June 2010 issue lists AGTHX (The Largest fund) with $161.9 Billion with VTSMX in second at $131 Billion. Morningstar also appears to combine classes and has VTSMX at $134.2 Billion versus $162.6 for AGTHX (as of 5/27/10).
While the largest fund title may take some time to resolve, there isn't much reason for the financial media not to cite the Wilshire 5000 as the primary US Equity benchmark. I would suggest that the answer to the questions "What is the US Market doing today?", or what did the US market do today, this week, this quarter, this year, this decade, etc., is best answered by citing the percentage change in the Wilshire 5000 for the respective period.
One journalist that uses the Wilshire 5000 is Mark Hulbert. Hulbert has used the W5000 as the benchmark for performance tracking of newsletters at the Hulbert Financial Digest (MarketWatch), which has 30 years of data. The investing public would be well served by increased reporting of the Wilshire 5000 index and the broad market at other major financial media sources as well.
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