What it means
Most well-known indices cover only a slice of the market. The Wilshire 5000 aims to include every US-headquartered company with readily available price data, from the largest giants to very small firms.
The name came from the roughly 5,000 companies it held when it began, although the number of stocks in it changes over time and no longer equals 5,000. The index is market-capitalisation weighted, meaning each company counts in proportion to its total market value, adjusted for the shares that are freely available to trade.
A company worth ten times another has about ten times the influence on the index level. As a result, a handful of very large companies drive much of its movement.
It is published by Wilshire, an investment advisory and index firm, and it is used in several ways. Fund managers use it to compare their performance with the whole market, and some funds are built to track it.
Analysts also use the total value of the index compared with the size of the economy as a rough guide to whether the market looks expensive. For a non-finance reader, the Wilshire 5000 is a useful answer to the question "how is the stock market doing overall?" It is broader than the Dow Jones Industrial Average, which has only 30 companies, and broader than the S&P 500, which holds around 500 large companies.
In practice, the three often move in the same direction because large companies dominate all of them. Like all indices, it measures price movement of the stocks in it and cannot be bought directly.
Investors gain exposure through funds and exchange-traded funds that track it or a similar broad index. The index methodology and the number of constituents are updated by the provider, so details should be checked at the source.
In practice
Real-world examples.
Example
A retirement plan committee wants a benchmark for the US stock portion of its portfolio. It chooses the Wilshire 5000 because it includes small and mid-sized companies as well as large ones.
Example
A financial journalist writes about the combined value of all US-listed companies. She cites the total market capitalisation of the Wilshire 5000 as a measure of the whole market, and compares it with the size of the national economy.
Example
A small-company fund manager reports that the fund returned 9% while the Wilshire 5000 returned 7%. He argues that the fund beat the total market, but the committee notes that smaller companies carry extra risk.
Formula
Calculation
Company weight = Company market capitalisation (free float) / Total market capitalisation of all companies in the index x 100
Suppose a tiny index has three companies: Alpha with a free-float value of $600 billion, Beta with $300 billion and Gamma with $100 billion. The total is 600 + 300 + 100 = $1,000 billion. Alpha's weight is 600 / 1,000 x 100 = 60%, Beta's is 30% and Gamma's is 10%. If Alpha's value rises 10% and the others are unchanged, the index rises by 60% x 10% = 6%.Case study
Seen in the real world.
Northgate Capital is a fictional asset manager and this case study is illustrative. The firm ran a US equity fund that had returned 8% in a year, and its marketing team wished to say the fund had beaten the market. The compliance officer asked which index they would use.
The team first compared the fund with a large-company index, which had returned 7%. The compliance officer pointed out that the fund held many mid-sized and small companies and so should be compared with a broader measure such as the Wilshire 5000, which returned 8.5%. The fund had actually trailed the total market by 0.5 percentage points, and the marketing material was changed to reflect this. The illustrative lesson is to choose a benchmark that matches what the fund holds.
Watch out
Common mistakes.
- Believing that the index holds exactly 5,000 stocks, when the number has changed over time.
- Assuming that the index treats all companies equally, when large companies have far more weight than small ones.
- Using it as a benchmark for a fund that holds non-US shares, which makes the comparison unfair.
Questions
People also ask.
Can I invest directly in the Wilshire 5000?
No, an index is a calculation, but funds and exchange-traded funds exist that aim to track it or similar total-market indices.
How is it different from the S&P 500?
The S&P 500 holds about 500 large companies, whereas the Wilshire 5000 aims to cover the entire US market, including small and mid-sized firms.
Why do the two often move together?
Because the largest companies make up most of the total value, they drive both indices.
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