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Total Market Index Funds Gain Favor

Step aside S&P 500, the Wilshire 5000 is having its day.

Index funds accounted for nearly half of the net inflows into mutual funds in July, but total market index funds are gaining in popularity, according to data compiled by Financial Research Corp. of Boston.

Total market index funds are those which invest in a composite of the entire market and most frequently follow the Wilshire 5000 Index. Vanguard of Malvern, Pa., Fidelity Investments of Boston, T. Rowe Price of Baltimore, Md., Schwab of San Francisco and Wilshire Asset Management of Santa Monica, Calif. all run funds that follow this index.

While index funds pulled in $4.2 billion and S&P 500 index funds had inflows of $1.9 billion in July, total market index funds had their best month ever with inflows of $964 million, according to FRC. That was the largest monthly inflow ever for that sector.

Total market index funds have seen an almost 100 percent increase in monthly flows this year over last. In 1998, the average monthly inflow into total market index funds was $425 million, according to FRC. This year, the average monthly inflow is $828 million. The best month for these funds before July was in April, when the funds attracted $960 million, according to FRC.

Vanguard and two of its index funds attracted a large share of the assets. The Vanguard Total Stock Index Fund pulled in $678 million for July, over two-thirds of the money that went into all total market index funds for the month. The Vanguard 500 Index Fund took in $1.2 billion, nearly two-thirds of the total money that went into S&P 500 index funds that month.

"Vanguard itself just has a tremendous amount of momentum," said Chris J. Brown, analyst for FRC.

Index funds overall have been gaining market share in a fund market that has been pulling in less new money this year compared to last. Through July 31, year-to-date inflows for all non-money market funds are down 44 percent from last year. But, in the past 12 months, index fund nearly tripled their market share. In the first seven months of last year, index funds accounted for 14 percent of all mutual fund sales. In the same time period this year, index funds have accounted for 38 percent of all mutual fund sales.

The popularity of index funds may be largely due to their performance and their low cost compared to managed funds, according to Brown.

Total market index funds, meanwhile, have gained in popularity because investors are trying to diversify their portfolios, said Brown. The S&P 500 is heavily weighted in large cap stocks. The Wilshire 5000 includes large-cap, mid-cap and small-cap stocks.

And, the Wilshire 5000 has performed nearly as well as the S&P 500. As of Aug. 31, the Wilshire 5000 Index has returned 7.28 percent year-to-date and 19.59 percent over the past 12 months. The S&P 500, meanwhile, is up 7.42 percent as of Aug. 31 and 20.9 percent over the past 12 months.

Total market index funds have not been as popular as S&P 500 index funds because they have not been around as long - seven years versus 23 years - and there are not as many of them, said Brown. There are five total market index funds and 22 S&P 500 index funds, according to

Despite the success of index funds, mutual fund sales overall are slow this year because investors are using the gains on their investments to purchase big-ticket items like cars or homes or to pay off debt, Brown said. Sales of non-money market funds were $196 billion in the first seven months of last year. In the same period of this year, the same group of funds has only attracted $110.2 billion, according to FRC.