TSP Funds Explained: What is the S Fund?

Throughout this series, we’ve explored how each of the Thrift Savings Plan’s core investment funds serves a different purpose for investors. We’ve covered the stability of the G Fund, the broad bond exposure offered by the F Fund, and the U.S. large-cap focused C Fund.

Now it’s time to turn our gaze toward one of the most misunderstood funds in the TSP: the Small Capitalization Stock Index Investment (S) Fund.

Most federal employees assume the “S” here stands for “small-cap,” and while that isn’t entirely wrong… it also isn’t the complete story.

In reality, the S Fund invests in far more than just small companies. Understanding what the fund actually owns can help you better understand how it fits into your overall retirement strategy.

What Is the S Fund?

The S Fund tracks the Dow Jones U.S. Completion Total Stock Market Index.

That’s a mouthful, but, luckily, the concept is actually fairly straightforward: the C Fund tracks the S&P 500, which represents approximately the 500 largest publicly traded companies in the United States… and the S Fund simply picks up where the C Fund leaves off.

Instead of investing in the companies found in the S&P 500, the S Fund invests in virtually all of the publicly traded U.S. companies that are not included in that index.

Think of it this way:

• The C Fund covers approximately companies #1 through #500 by market capitalization.
• And the S Fund begins with company #501 and continues through thousands of additional publicly traded companies.

That creates exposure to a much broader portion of the U.S. stock market.

Wait So It’s Not Just a Small-Cap Fund?

Here’s where many Feds we speak with are surprised.

Although the S Fund includes thousands of small companies, it also owns medium-sized companies, and even some companies that many investors would still consider relatively large.

Why? Because the S&P 500 isn’t a fixed list forever. Companies are regularly added to and removed from the index as their size and market value change.

That means the companies sitting just outside the S&P 500 can still be extremely large businesses. In fact, it’s not uncommon for roughly one-quarter of the S Fund to consist of companies that many market professionals would classify as large-cap stocks.

So, while the S Fund certainly provides meaningful exposure to smaller companies, calling it a pure small-cap fund drastically oversimplifies what’s actually inside the portfolio.

Why Does This Matter?

You might wonder whether this distinction really makes a difference, and from an investment education standpoint, it absolutely does.

For example, imagine a federal employee wants 20% of their retirement portfolio invested specifically in smaller U.S. companies. They might move 20% of their TSP balance into the S Fund, believing they’ve achieved their objective.

But because the S Fund isn’t exclusively invested in small-cap stocks, their actual exposure to smaller companies is likely far less than they intended, and converserly, their exposure to U.S. large-cap stock is much higher than intended.

This is why it’s important to understand what you’re buying before making allocation decisions. (And also why I’m writing this series on the TSP Funds for you!)

The Role of Smaller Companies

So, if the C Fund is such a growth driver lately, why should you care about having exposure to small-cap stock?

Historically, smaller companies have played an important role in long-term investing. While they have generally experienced greater volatility than large, established companies, they’ve also offered periods of strong long-term growth. Smaller businesses often have more room to expand than mature corporations, but they can also be more sensitive to economic slowdowns, changes in interest rates, and business conditions.

Like every asset class, the small-cap stocks experience cycles. There are periods when smaller companies outperform larger companies, and periods when the opposite is true. Predicting when those shifts will occur is extraordinarily difficult, which is why diversification remains an important principle for many long-term investors.

How the S Fund Complements the C Fund

One helpful way to think about the C Fund and S Fund is that together they provide broader exposure to the U.S. stock market than either fund could provide on its own. The C Fund focuses on America’s largest publicly traded companies, and the S Fund expands that exposure by investing in thousands of companies outside the S&P 500.

While there is the potential for some overlap in company size near the dividing line between the two indexes, the funds are designed to complement one another rather than compete.

It’s About More Than Picking a Fund

One of the most common questions we get from Feds while discussing TSP allocations is, “Which TSP fund is the best?”

The reality is that there isn’t a universal answer. The “best” investment depends on your retirement timeline, income needs, pension, Social Security benefits, other investments, tolerance for risk, and overall financial objectives.

That’s why we believe education should come before allocation. When you understand the underlying investments each fund actually owns, you’re better equipped to ask the right questions and make informed decisions as part of a comprehensive financial plan.

The S Fund offers federal employees access to thousands of U.S. companies outside the S&P 500, making it much more than simply a “small-cap fund.” While it does provide significant exposure to smaller companies, it also includes mid-sized businesses and even some larger companies that fall just outside the S&P 500. Understanding that distinction can help you better evaluate how the S Fund fits into your overall investment strategy.

Because every federal employee’s financial picture is unique, we can’t recommend a specific TSP allocation in a general article. The appropriate mix of investments depends on your personal goals, retirement timeline, income needs, risk tolerance, and the rest of your financial plan.

If you’d like help understanding how the S Fund fits into your retirement strategy, the team at Serving Those Who Serve is here to help. Email [email protected] to schedule your complimentary federal benefits review. We’ll help you evaluate your federal benefits, discuss your long-term objectives, and determine an investment strategy that’s appropriate for your individual circumstances.

And be sure to join us next week for the final installment of this series, where we’ll wrap things up by exploring the I Fund, including how it has evolved over the years, what markets it invests in today, and why understanding international diversification is a critical part of building a balanced TSP allocation.

**Written by Katelyn Murray, CFP®, ChFEBC®, FBS®, CFT-1™, ECA. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Katelyn Murray and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **