The Vanguard Total Stock market (VTI) has long been held the best way to passively “own the entire market”. Its rock bottom expense ratio makes it hard to beat. Although if I were to nitpick, I’d say that the only flaw may be that it overweights giant and large cap stocks by a pretty wide margin. This is obvious since the fund is market cap weighted, but the question I pose is can investors do better? Is this fund an active bet that large and giant cap stocks will continue to outperform? And can investors do better by equally weighting their portfolio with Large, Mid and Small cap passive index funds?

Here we see that VTI is made up of about 71.5% giant and large cap stocks. Maybe for a more risk averse investor, this may be exactly what they want.

However what if we made three equal investments into a Large cap, Mid cap, and Small cap index ETF (so roughly 33.3% in each)? This way we don’t need to worry about what market cap will outperform in the future (no one knows) because we are equally allocated to each.

Here is the summary using data from Morningstar from 2006 to present. I used iSHARES Large, Mid, Small cap ETF’s (more volume) but Vanguard has their own market cap funds as well (VOO, VO, VB).

The result was an average gain over VTI by about 50 basis points. Now I guess this is to be expected since we have a bigger allocation to small and mid cap stocks (generally regarded as higher risk to reward) but notice the outperformance in 2008 by about 2% as well.

The hypothetical growth of $100k over this time frame shows an additional almost $10k of gains with a lower standard deviation.

Now it’s probably not a good idea to form a definite conclusion based upon a small sample size. The purpose of this post was to simply propose a different passive strategy that has outperformed over the last 10 years and could possibly continue to outperform (with better risk adjusted returns) as well.