Most investors are probably familiar with the S&P 500 Index, the go-to index for large-cap stocks. The S&P 500 Index contains 500 of the largest publicly-traded U.S. stocks by market capitalization, as well as other criteria.
It is likely that investors are less familiar with the even broader Wilshire 5000 Index, which is a market-cap-weighted index of all equities that are actively traded in the United States. The sheer number of stocks contained within the Wilshire 5000 it a very useful tool to find investment ideas. Investors looking for high-quality stocks with strong brands, competitive advantages, and growth potential will likely find several attractive candidates in the Wilshire 5000.
Wilshire 5000 Index Overview
As its name suggests, the Wilshire 5000 Index holds thousands of stocks—but not necessarily 5,000. There were exactly 5,000 components when the index was created in 1974, by Wilshire Associates. As of 6/30/18, there were exactly 3,486 stocks in the index. The mean market capitalization of the index is $8.5 billion. The goal of the index is to essentially track the performance of the entire U.S. stock market. This is why the Wilshire 5000 is sometimes referred to as the total market index.
The Wilshire 5000 is a highly diversified index, as is the S&P 500. The Wilshire 5000 has hundreds of stocks across all major market sectors. The sector classifications are as follows:
- Information Technology: 24% of holdings
- Financials: 15% of holdings
- Health Care: 13% of holdings
- Consumer Discretionary: 13% of holdings
- Industrials: 10% of holdings
- Consumer Staples: 7% of holdings
- Energy: 6% of holdings
- Real Estate: 4% of holdings
- Materials: 3% of holdings
- Utilities: 3% of holdings
- Telecom Services: 2% of holdings
The Wilshire 5000 includes all U.S. equities that have readily-available prices. Certain issues such as bulletin-board and other thinly-traded stocks are excluded, as their share prices are not easily obtained. Also, limited partnerships and American Depositary Receipts are not included in the index.
S&P 500, Wilshire 5000, Or Something Else?
Both the S&P 500 and Wilshire 5000 are designed to track the largest publicly-traded U.S. stocks. In both cases, they are viewed as proxies for the U.S. stock market and to a lesser extent the U.S. economy. But there are certain differences between the two. First, the Wilshire 5000 is a much more expansive index. It has nearly seven times as many components as the S&P 500. In addition, the S&P 500 is more concentrated around large-cap stocks. It has a mean market capitalization of $47.8 billion—which indicates investors will receive more exposure to mid-cap and small-cap stocks with the Wilshire 5000. In terms of sector allocation, both indexes are highly similar. The Wilshire 5000 has a slightly higher representation of technology stocks, and a slightly lower allocation to real estate than the S&P 500. For investors who want a significantly different investment option than these two large-cap indexes, the Russell 2000 is a small-cap stock market index that offers growth potential of small-caps, albeit with greater volatility.
Both the S&P 500 and Wilshire 5000 have dividend yields slightly less than 2%. As a result, income investors will presumably find them roughly equal. However, value investors might favor the S&P 500—it has an average price-to-earnings ratio of 22.8, compared with 25.6 for the Wilshire 5000. Again, this is due to the Wilshire’s higher level of exposure to smaller growth stocks. This exposure means the Wilshire 5000 may underperform during a market downturn, as large caps tend to outperform small-caps when markets are falling.
The reverse may also be true; the Wilshire 5000 could outperform during bull markets, although it did not significantly outperform the S&P 500 in the years since the Great Recession ended. For example, in the past 10 years the Wilshire 5000 generated total returns of 10.23% per year. The S&P 500 generated total returns of 10.17%.
Therefore, the S&P 500 and Wilshire 5000 appear to be more similar than they are different. The major advantage to the Wilshire 5000 is its higher number of holdings, which provides investors with greater diversification.