Close-Up: Wilshire 5000 Total Market Index

Physician's Money Digest, January31 2003, Volume 10, Issue 2

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Wilshire 5000 Total Market Index: A statistical measure of the changes occurring in the stocks of more than6500 US-headquartered companies.

In 1980, Wilshire Associates created the Wilshire 5000Total Market Index, formerly known as the Wilshire5000 Equity Index. It became known as the "total marketindex"because, contrary to other indexes thatmeasure stocks representing a portion of the overallmarket, the Wilshire 5000 attempts to track the returnsof practically all publicly traded, US-headquarteredstocks that trade on the major exchanges.

In any case, its name is a misnomer. But since thenumber of companies the index tracks fluctuates(depending on how many companies are listed on themajor exchanges), sticking with Wilshire 5000 makesthe most sense. Its name aside, while the index is lesswell known than many of the others—such as the S&P500 and the Nasdaq—it is the largest index by marketvalue in the world.

LEARNING AN INDEX LESSON

To understand the Wilshire 5000, or any of its peerindexes, it's important to first understand what anindex is and how it works. For starters, it would bemuch too difficult to track every stock that is publiclytraded, so a representative sample of the market isused. This is similar to the way a pollster uses politicalsurveys to gauge the sentiment of the population. Inthis case, investors use indexes to track the stock market'sperformance. Ideally, a change in the price of anindex would represent an exactly proportional changein the stocks included in the index.

Most indexes weight companies based on marketcapitalization. For example, if a company's market capitalizationis $1 million and the value of all stocks in theindex is $100 million, the company would be worth 1%of the index. Market capitalization is the value of acompany's outstanding shares, as measured by sharesmultiplied by the stock's current price. Generally, thelarger the market capitalization, the safer the company.The Wilshire 5000 Total Market Index is market-capitalizationweighted. This gives larger companies moreinfluence over the index movements.

In reality, an index is nothing more than a list of stocks,and anybody can create a list. Recall the recent dot-combull market when many investing publications created anindex representing a section of new economy stocks. Inthe end, what separates one index from another is thereputation of the company that puts out the index.

Wilshire Associates, which started the Wilshire 5000,is an independent employee-owned investment advisorycompany. Founded in 1972, the companyprovides investmentproducts, consulting,and tools to fundsponsors, investmentmanagers, and individuals.The companyserves more than 400organizations in over20 countries representingassets totalingmore than $2.5 trillion.

MEASURING THE 5000 WAY

Because of its size, many investors today consider theWilshire 5000 to be the best measure of the entire USstock market. There are, however, some key strengthsand weaknesses investors should be aware of.

The Wilshire 5000 is easily the most diversified of allindexes, comprising all US-based companies traded on theNew York, American, and Nasdaq stock exchanges. Becausethe index only contains companies headquarteredin the United States, it omits many strong foreign companies.As a result, it measures only domestic economic performance.In addition, the index's 500 largest companiescomprise more than 70% of the index's value, so total performanceis weighted toward the top few companies.

Investors can purchase an index fund that representsthis index, and because of its diverse nature it offers agood investment base. However, investors should beaware that the expense ratio for a fund containing everylisted company is likely to have higher transaction coststhan less broad indexes. As a result, investors are likely topay higher fees with a Wilshire 5000 index investment.

As noted, the number of companies in the indexfluctuates. Additions to the index are made once amonth after the month-end close. IPOs, when they areadded to the index, are generally done at the end ofthe month as well.

Highs and Lows of the Wilshire 5000

We all have good days and bad days. And weknow, some of us all too well, that the stock markethas them as well. The Wilshire 5000 Total MarketIndex is no exception. Here are some all-time highsand lows that the index has achieved in its relativelybrief 22-year history.

  • The largest all-time nominal increase occurredon January 3, 2001, virtually as the new year arrived.The increase was 616.34, and it brought the index upto 12,380.26 that day.
  • The largest 1-day percentage increase of alltime occurred on October 21, 1987, when the indexrose 182.71 to 2553.13, or a 7.71% increase.
  • On the down side, the greatest 1-day nominaldecline occurred not too long ago—on April 14,2000, the day before taxes are due. Any coincidence?The decline was 860.79, and it brought the indexdown to 12,474.65.
  • The single-day record for percentage declineshappened back on October 19, 1987, when theindex fell 503.18 to 2310.30, a 17.89% drop. That'smore than double the next greatest percentagedecline, 8.38%, which occurred just 1 week later onOctober 26, 1987.

CME Quiz

1) How many stocks does the Wilshire 5000 track?

  1. 2500
  2. 3000
  3. 5000
  4. More than 5000

2) Before it was called the Total Market Index, theWilshire 5000 was known as:

  1. Equity Index
  2. US Stock Index
  3. Market Capitalization Index
  4. Very Large Index

3) The Wilshire 5000 was started by:

  1. Wilshire Boulevard Investments
  2. Wilshire Associates
  3. Wilshire Equity Advisors
  4. Wilshire Stock Analysis

4) What type of fees are investors likely to pay with aWilshire 5000 index investment?

  1. small
  2. moderate
  3. high
  4. none

5) The Wilshire 5000's greatest 1-day percentage declineoccurred 1 day prior to:

  1. Election Day
  2. President's Day
  3. Baseball's opening day
  4. Income tax day

Answers: 1) d; 2) a; 3) b; 4) c; 5) d.