Is Holding the Entire U.S. Stock Market Better Than Just the S&P 500?
As of mid-September 2025, investors face a pivotal question: is buying a position in the entire U.S. stock market a more rewarding or safer choice than investing purely in the S&P 500? Recent performance data, portfolio concentration and risk metrics suggest the trade-offs are closer than many expect — and the answer may depend heavily on your risk tolerance, investment horizon, and what you consider “the market.”
What We Mean: “Entire Stock Market” vs. “S&P 500”
- S&P 500: Index tracking 500 of the largest U.S. companies by market cap, representing roughly 80% of U.S. public equity market capitalization. (Wikipedia)
- Total U.S. Stock Market (e.g. Vanguard Total Stock Market Index Fund): includes large-, mid-, small-, even micro-cap stocks, often thousands of names — more breadth but many very small positions. (Nasdaq)
Recent Performance: How They’ve Fared
| Period | S&P 500 Total Return* | Total U.S. Stock Market Fund (Vanguard style) |
|---|---|---|
| Last 5 years (with dividends reinvested, to ~Sept 15, 2025) | ≈ 109% via SPDR S&P 500 ETF (Nasdaq) | ≈ 103% via Vanguard Total Stock Market Fund (Nasdaq) |
| 2022 (crash period) | −18.2% S&P 500 (Nasdaq) | −19.5% total stock market fund (Nasdaq) |
All returns include dividends, rebasing to zero at the start.
So far, the S&P 500 has slightly outpaced the total market in recent years, despite its narrower scope.
Why the Differences Are Small and What Matters
Weight of Small Stocks Is Tiny
In a total market fund, after the ~200th largest stock, individual names often make up < 0.1% of the portfolio; the 500th largest might be only ~0.02%. Because these tiny components are small in weight, they contribute little to total return (but do increase breadth). (Nasdaq)
Market Crashes Hit Most Stocks
In big downturns, nearly all equities large, mid, and small-caps tend to fall, though sometimes small caps fall more. For example, in 2022, both S&P 500 and the total market fund dropped heavily. (Nasdaq)
Concentration Risk in S&P 500
Although the S&P 500 includes “only” 500 companies, its performance is heavily driven by the largest ones. As of recently, mega-caps (especially in tech) dominate index returns. This means S&P investors are exposed to risk if a few big names falter. External reports note that markets have become more top-heavy, making the S&P 500 behave sometimes like a growth or large-cap index rather than a balanced slice of the market. (Nasdaq)
Pros & Cons: Total Market vs. S&P 500
| Feature | Total U.S. Stock Market | S&P 500 |
|---|---|---|
| Diversification (Breadth) | More stocks = more sectors & cap sizes. Small caps can help in economic recoveries and when growth shifts. | Focused on large caps; includes many mega-caps so risk is concentrated. |
| Risk in Downturns | Small & mid-caps often more volatile; may underperform during certain severe drops. | Large-caps may be more resilient in some crashes but also exposed to high valuation risk. |
| Potential Upside | If small/mid-caps rally or undervalued sectors catch on, potential extra gain. | Strong upside when large caps are leading (e.g. tech, consumer, AI) which has been recent case. |
| Cost / Fees / Liquidity | Total market ETFs often slightly higher fees or slightly less liquid than super popular S&P funds but still quite efficient in many cases. | Very liquid, low cost, many fund/ETF options. |
| Simplicity & Tracking | More complex in breadth; small names harder to track, more turnover. | Easier to replicate, widely accepted benchmark. |
What the Experts Say
- Many portfolio managers argue that diversification across size and sectors reduces idiosyncratic risk even if it doesn’t always increase return.
- But some investors prefer the S&P 500 because mega-caps have delivered outsized returns lately, especially in tech and AI sectors.
- Historical valuation metrics (forward P/E, CAPE ratio) suggest that the S&P 500 is trading at elevated levels relative to past cycles; when valuations are high, downside risk rises. (Nasdaq)
When One Option Might Be Better Than the Other
- If you have a long investment horizon and can tolerate volatility, the total U.S. market may give you exposure to recovery and growth in smaller companies that are currently under-owned.
- If you prefer lower risk / more stability, or want a benchmark that is widely trusted, investing in the S&P 500 might make more sense.
- If you’re concerned about overvaluation in big tech / growth stocks, you may want to lean more toward a balanced or equal-weight approach, or include value sectors, not just cap-weighted large-cap exposure.
Key Takeaways
- Over the past 5 years, S&P 500 slightly outperformed the total stock market by ~6 percentage points including dividends. (Nasdaq)
- During downturns like 2022, both approaches suffer; the total market may suffer slightly more due to small-cap exposure. (Nasdaq)
- Breadth and small-cap exposure can offer extra return when market leadership rotates.
- Large-cap concentration in S&P 500 provides simplicity and liquidity, but also risk if big stocks get hit.
- Investors should align choice with risk tolerance, timeframe, and views on valuation / economic growth.
Also read, Stock Market Hits New Records on Nvidia-Intel Deal.
F.A.Q.
Not always. While it gives more diversification, small and mid-cap stocks are often more volatile; in severe bear markets they might decline more sharply than the large caps in the S&P 500.
For most broad ETFs/funds tracking either benchmark, fees are very low. Differences are usually small; what matters more is tracking error, fund size, and liquidity.
Yes. Many portfolios use a core of S&P 500 exposure plus satellite positions in total market funds, small-cap, value, or sector funds to balance risk and capture upside.
When valuations (e.g. P/E, CAPE ratio) are high in large caps, risk increases. If small/mid caps are inexpensive, total market exposure may provide better downside protection and growth potential.
Jason Brooks is a senior financial journalist and market analyst at ReadBitz.com, where he serves as a trusted guide to the fast-paced and complex world of stocks and finance. With a sharp eye for market trends and a commitment to data-driven reporting, he delivers daily news and analysis designed to empower investors, traders, and business leaders with the clarity needed to navigate the global economy.