VFINX in past represented 70% of total U. S. stock market capitalization.
VTSMX give you exposure to other 30% too (midcaps and small caps), but gives you even more diversification, lower portfolio turnover, and greater tax efficiency.
Changes in SP500 index which may make tracking funds buy or sell particular stock would not require same buying or selling in total market index because company is still part of total stock market in U.S. Only changes would be companies that are delisted from stock market or new companies entering stock market. I think almost all of VTSMX distributions will be dividends, where as SP500 may churn out slightly capital gains from year to year as S & P changes makeup up of their SP500 index.
VTSMX is a great core investment for taxable account targeted at retirement, especially if you draw down mandatory distributions from tax deferred accounts first and let VTSMX compound almost tax free (because of it's I think 99% tax efficiency) for say first 10 or more years of retirement, giving you the growth component you will need to have your overall portfolio still keep up with inflation. Even if you plan to retire in 30 years, VTSMX in a taxable account can essentially compound tax free for 40 years or more if you are wise in your overall portfolio composition and planning. And you can adjust holdings in tax deferred accounts to be less aggressive (e. g. balanced or full bond funds) at say age 50 when you are getting closer to retirement and your risk tolerance has gone down.
International exposure, from a long term perspective, only increases risk adjusted returns of overall portfolio, not necessarily increasing absolute returns. Plus lots of multi-national us companies in SP500 and Total Stock Market index will get good share of their earnings going forward from emerging markets, so you may be getting exposure you don't think.
Remember that a broad market index is highly diversified, so there will be times when a particular sector is hot where it will seem to "lag" (and lag very badly because it owns whole stock market, not just the hot sector a sector fund can concentrate on) over the short term. But most likely it will close that gap and actually beat most funds over extended periods of time because of reasons I mentioned above (again, I am talking in terms of
decades, not years).
Instead of trying to beat the market at any given time on any given day, VTSMX just takes what the market gives you, and in the process, over very extended periods of time (again, decades, not years), it will beat the vast majority of actively managed mutual funds out there.
A few links I found by googling for how many mutual funds beat index after 20 years:
http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html
Over a 25-year period ending in 2009, about 25% of the surviving actively managed general equity funds outperformed the
Vanguard 500 Index Fund. The result dropped to about
12% after adjusting for all the terminated funds during the period. This 12% result was exactly the number predicted by the simulation model.
Active fund investors have strong headwinds against them. The probability of selecting a winning fund is low; the average excess payout for guessing right doesn't compensate investors for the shortfall from guessing wrong; owning several active funds reduces the probability a portfolio will outperform an all index fund portfolio; and the longer those active funds are held the worse it gets.
That's a lot of headwind for investors to overcome!
Put in perspective,
dedicated active fund investors can look forward to a 99% probability their portfolio will underperform an all index fund portfolio over their lifetime.
That's an almost guaranteed losing bet that even the most ardent gambler would avoid.
http://www.forbes.com/2010/04/22/mu...anagement-personal-finance-indexer-ferri.html
VTSMX,
VTMSX,
VTSMX! (not all index funds are created equally; you have to know who fund manager is (you don't want to have to sell and buy another index fund after say 20 years when current fund manager suddenly becomes shareholder unfriendly and jacks expense ratio to make more money for themselves), what expense ratio is, and what specific index is tracked). As long as Vanguard holds to Bogle's vision, VTSMX seems like best choice for long-term index investor, especially in taxable account (Vanguard is always decreasing expense ratio as assets grow, and they automatically convert you to Admiral Shares, without tax consequences, once your holding reaches minimum threshold).