Updated as of December 31, 2020. The S&P 500 is often used as a measure of the entire US stock market, and for good reason, but that sometimes leads investors to believe they need only invest in a fund that tracks the famed index. To better understand the US equity landscape, it is helpful to explore some of the most widely used benchmarks, which are designed to track companies of various market capitalizations.
Benchmarks not only frame our perception of the investable universe, they’re also used to compare the relative performance of an ETF or mutual fund with a similar investment objective. It’s worth noting that there is no uniform rule as to what constitutes small cap or midcap. Further, as the chart below illustrates, given that 88% of the market capitalization of the entire US stock market currently comes from the largest 500 companies, efforts to diversify must be measured and deliberate.
Also read:
What History Can Teach Us About Asset Class Diversification
Investing Outside of the S&P 500: Looking at Global Diversification