What are the advantages of investing in an S&P 500 index fund as a core portfolio holding, as opposed to a total stock market index fund? Over time, wouldn't a total stock market index fund outperform an S&P 500 fund? – Peter G.

There's a lot of overlap between an S&P 500 index fund and a total stock market fund, says Roman Franklin, president of Franklin Financial Planning in New York, N.Y. The main difference is that total stock market funds hold a broader selection of stocks than an S&P 500 index fund.

An S&P 500 index fund is designed to mirror the S&P 500 index, which is made up of the top 500 large-capitalization companies in the United States. A total stock market index fund, however, can hold many small- and mid-cap companies along with the large-cap stocks held in the S&P 500.

An S&P 500 index fund is considered a more defensive investment than a total stock fund, according to Franklin. One reason: S&P 500 index funds generally offers more exposure to sectors such as utilities and consumer staples, which tend to generate steadier returns during tough economic times. On the other hand, a total stock market index fund can benefit from the extra growth potential provided by the small- and mid-cap companies represented in the index. Shares of these smaller companies tend to post slightly higher returns over time because of the greater growth potential, but they also can be more volatile in the short term.

— Marc Mewshaw

Updated 9/19/2012 3:39 pm

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