When investors want to invest in the broad stock market, many use funds that track the Standard & Poor’s 500 stock index. But that index reflects prices of only the biggest publicly traded US companies, leaving out thousands of smaller companies. To close that gap, investors can buy a so-called “extended market” index fund.
Typically, this type of fund invests in most of the stocks outside the S&P 500, which means, for example, 3,336 stocks in the Vanguard version…3,315 in the Fidelity version…and 1,636 in the T. Rowe Price version, a fund that uses a sampling of stocks to capture the returns of the extended market. Although these funds tend to be 25% more volatile than the S&P 500, they have offered higher long-term returns—an annual average of 7.8% over the past decade versus 7.2% for S&P 500 funds. However, in the past year, extended-market funds have lagged, losing about 2% versus a gain of 1.4% for S&P 500 funds and reflecting a weak year for small and medium-sized companies.
If you currently hold mostly large-company stocks, such as those in the S&P 500, consider adding enough shares in an extended-market fund to reflect the makeup of the overall market. The S&P 500 index captures about 80% of the market’s total value…stocks outside the index, about 20%. If you want to be more aggressive, you can allocate more to an extended-market fund. Or if you want to combine the S&P 500 with the extended market in a single fund, consider a “total market” index fund.
Consider expenses. Fidelity Spartan Extended Market Index Fund (FSEMX) and Vanguard Extended Market ETF (VXF) charge 0.1% per year, the least of all extended-market funds.