S&P 500 vs. Total Market Index: Best for Long-Term Growth?

Index funds provide efficient and low-cost broad market exposure, which makes them an ideal choice for long-term investment portfolios. Investors frequently look to S&P 500 index funds as well as “total market” index funds as their primary investment choices.

The S&P 500 represents a collection of the 500 largest American publicly-traded companies that collectively account for about 80% of the total capitalization of the U.S. stock market. Large-cap companies, like those found in the S&P, usually pose less investment risk when compared to smaller companies.

Total market index funds expand their investment scope to include almost every public U.S. company of all sizes, which provides mid-cap and small-cap exposure that offers higher growth possibilities alongside large-caps, but which also often have higher volatility. 

This article compares S&P 500 funds with broader market funds across key factors: the degree of market exposure, past performance records, expected volatility levels, growth prospects, and the appropriateness for various investor profiles, to help you understand which index fund aligns with your investment strategy.

Understanding S&P 500 Index Funds

Focus on Large-Cap Stocks 

S&P 500 index funds hold roughly 500 of the largest American-listed companies chosen by the S&P Index Committee. To be included in the index, these companies need to satisfy requirements for market capitalization, liquidity standards, and profitability metrics.

Large-cap investments allow investors to access established multinational corporations with proven business models and stable cash flows that possess the resources to survive economic downturns. The backbone of the American economy consists of these companies that lead each major sector.

S&P 500 funds prioritize large-cap stocks, which results in limited investment opportunities in smaller enterprises that are in early growth phases or new industry sectors. The restriction may limit extended growth potential when compared to broader market indexes.

Lower Volatility 

S&P 500 index funds often display less volatility than total market funds, which makes them an attractive choice for investors. Large-cap companies have historically shown greater stability, as they tend to be more mature and with more reliable revenue streams and stronger balance sheets, which help them weather economic difficulties.

This means that the S&P 500 typically experiences less severe losses through bear markets compared to riskier indexes. This may appeal to more conservative investors who prefer lower risk exposure or who have shorter investment horizons–even though this choice may also lead to somewhat lower long-term growth potential.

Historical Performance 

Since its establishment in 1957, the S&P 500 has provided robust long-term investment performance by producing average yearly total returns upwards of 10%, before accounting for inflation–and over 14% per year between 2020-2025. The exceptional performance of the S&P 500 throughout the last decade resulted from the significant expansion of leading technology companies like Apple, Nvidia, Google, and Meta (Facebook), among others.

Total Market Index Funds

Broader Diversification 

Total market index funds reflect the full U.S. equity market through the tracking of all-encompassing indexes such as the Wilshire 500 Index, the CRSP US Total Market Index, or the Russell 3000 Index. Total market index funds that track one of these indices will contain 3,000 to 4,000 stocks that consist of every component of the S&P 500, along with thousands of other mid-cap and small-cap stocks.

By investing in total market index funds, you achieve true diversification across all market-cap sizes and every economic sector. Large-cap stocks tend to maintain their dominance within these indexes as they represent around 80% of the total stock market by weight, but smaller companies in these indexes offer investors access to alternative growth dynamics and opportunities.

Potential for Higher Growth

Indeed, over extended periods, smaller companies tend to produce comparatively higher returns than larger companies–but this comes with trade-offs that include higher volatility and steeper declines during bear markets. The “small-cap premium” exists in some market cycles, but research shows that patient investors who maintain their investments for very long periods (e.g., 20 years or more) can benefit from the total market approach’s enhanced growth potential.

The wider scope of diversification of total market funds also decreases company-specific risk while still enabling potential gains from emerging sectors and innovative small companies that lack sufficient size for S&P 500 consideration.

Higher Volatility 

Since small and mid-cap stocks are often more volatile compared to large-cap stocks, total market indexes, too, become inherently more volatile than the S&P 500. The excess volatility comes from several sources:

• Smaller companies can encounter more difficulties during economic downturns.
• Access to capital can become more restricted.
• Their customer base might be less diversified.
• Their products and services often fall into the category of non-essential items.

Total market funds therefore face more pronounced drawdowns during market corrections and bear markets because. Investors who check their portfolios regularly or feel uncomfortable with higher risk may find these large variations difficult to handle.

Which One Should You Choose?

Investment Goals

• Core-and-satellite: If you want to build a multi-fund portfolio, use an S&P 500 fund as your “core” and add targeted small-cap or factor funds separately.
• One-stop simplicity: If you’d rather use a single fund for all U.S. equities, total-market ETFs or mutual funds give fuller coverage without squeezing out small-caps.

Risk Tolerance

• Lower drawdowns: S&P 500’s large-cap tilt typically means somewhat shallower drawdowns and a steadier ride.
• Growth seeking: If you can stomach larger swings and want every sliver of small-cap growth, total-market funds offer that extra slice of potential reward.

Time Horizon

• Multi-decade: Over 15+ years, small-cap premiums tend to accrue, making total-market funds marginally more rewarding if you stay the course.
• Near-term needs: If you expect to tap into gains within <10 years—closing in on a retirement date—an S&P 500 fund may help limit downside risk.

Other Portfolio Considerations

• International exposure: Both funds cover only U.S. stocks. If you already use an international fund (e.g., VXUS), anchor your U.S. sleeve in whichever fund fills the gap you need.
• Sector or factor tilts: If you hold separate value, growth, or sector ETFs, an S&P 500 fund can avoid overlap in mid- and small-cap segments.

Real-World Metrics: A Side-By-Side Comparison

Let’s consider two Vanguard ETFs, one its S&P 500 fund (VOO) and the other its total market fund (VTI). Looking at their historical performance in the table below, we can see that the S&P 500 does have marginally lower risk metrics (a slightly higher Sharpe ratio,  a slightly lower max drawdown, and standard deviation) but only marginally so. But over the past 10 years, in fact, the S&P 500 fund even outperformed the total market fund by 0.66% per year (as of April 30, 2025)–which contradicts the conventional wisdom that broader and smaller-cap exposure leads to better returns.

This outperformance might be attributed to the dominance of large-cap growth stocks in the S&P 500, particularly tech giants, which have driven much of the market’s gains during this period. Companies like Apple, Microsoft, Amazon, and Alphabet (Google) have delivered exceptional returns, benefiting S&P 500 funds that hold larger positions in these companies compared to total market funds.

However, this pattern isn’t necessarily indicative of future performance. Markets rotate over time, and there have been extended periods when small and mid-cap stocks outperformed their large-cap counterparts. For example, from 2000-2010, small-cap stocks generally outperformed large caps as the market recovered from the dot-com bubble.