Question re: VTSAX Trends vs. Dow/S&P/NASDAQ

[Legal Eagle]

Hello,

Had a quick question - perhaps a stupid one - but one I'd like some help answering.  For yesterday, I show VTSAX going up by 2.61%.  But when I looked at the Dow, S&P, and NASDAQ, all three of them went up more than that..like say 2.85% to 3% (rough numbers, didn't jot them down...suffice it to say, EACH more than 2.61%).  I notice on many days that VTSAX does not 100% track with what occurs in the markets, but to think that a total stock market fund would go up 10%+/- less than the markets that comprise its holdings surprises me.

I think I probably just have a poor understanding of what VTSAX holds.  If I'm not mistaken, it holds stocks "representative" of the whole market, rather than "all" of the market.  Again, just seems like that's a very wide gap, which I realize is only one day's worth of valuation, so probably not the best indicator either way.  But I do see this from time to time, and it's probably time to actually understand it for myself since I have been pouring money in for years and continue to do so.   

Thanks!

[TheAnonOne]

VTSAX holds every US stock.

SP500 holds the largest 500
DOW (basically but not really) holds the largest 30

Basically, VTSAX holds mid and small cap stocks as well. When you see VTI(VTSAX) underperform its simply because large-cap went up more than small-cap. You will see days where VTI beats the SP500 or DOW.

Go look at the "russel 2000" because VTSAX is closer to a melding between the R2000 and Sp500.


Hope that helps!

[Legal Eagle]

Thank you - that's very helpful. 

[Heckler]

It also works in the opposite direction - greater diversity makes for less downside (sometimes)

[grantmeaname]

If I'm not mistaken, it holds stocks "representative" of the whole market, rather than "all" of the market.

Yes.

VTSAX holds every US stock

No.

VTSAX holds a portfolio of many of the stocks that comprise the index it tracks in a way that is calculated to be as equivalent as possible. The fund's prospectus says:

The Fund employs an indexing investment approach designed to track the performance of the CRSP US Total Market Index, which represents approximately 100% of the investable U.S. stock market and includes large-, mid-, small-, and micro-cap stocks regularly traded on the New York Stock Exchange and Nasdaq. The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield.

An index is a synthetic number and not a fund or vehicle. An index doesn't "own" anything. It's just a number that an information service like CRSP, MSCI, Standard and Poor's, or Dow Jones calculates. Here is a fact sheet on the index that VTSAX aims to track. To the extent that VTSAX's portfolio is not identical to the components of the index, and to the extent that Vanguard incurs expenses in managing the fund, there is some tracking error between the net asset value of the fund and the movement of the index itself. It's minute and much smaller than 10% of any one day's movement. Another easy way to see tracking error is to compare Vanguard's S&P 500 tracker fund with the S&P 500 index.

The differences you have noticed are mostly explained by the differences between the way the CRSP index moves and the way that the Dow (mega-cap industrial index, weighted by share price instead of company market capitalization because it's dumb and old), NASDAQ (cap-weighted but overweighted in tech and other industries that prefer the NASDAQ to other exchanges), and S&P 500 (a cap-weighted large-cap index which does a decent job of approximating the total market but is missing the smaller companies). Ultimately, in my opinion, CRSP's index does a good job of measuring what's happening in the markets and the "big three" indices quoted on the news are all less good to differing extents.