This article is on the TSP S Fund (“the Fund”), one out of five individual savings plans available under the Thrift Savings Plan umbrella. We will be talking about the following topics:
- What are the eligibility requirements for investing in the Fund?
- What is the Fund’s investment objective?
- What kind of returns should I expect if I invest?
- What would be the risk profile of a hypothetical investor?
- What are the main selling points of the Fund?
- Are there any points I should be aware of prior to making my investment?
What are the eligibility requirements for investing in the TSP S Fund?
The Federal Employees Retirement System comprises three major components, with the Thrift Savings Plan being one of them (the other two being Social Security and the FERS annuity). Consequently, if you are a Federal employee, you would most probably be eligible to invest in the Fund. Nonetheless, we recommend that you view the full list of such requirements at the TSP official site here.
What is the Fund’s investment objective?
The Fund, which is passively-managed, tracks the Dow Jones US Completion Total Stock Market Index. This is a broad market index that seeks to represent all US equity issues, excluding the S&P 500 Index (which is covered by the TSP C Fund). The ‘S’ in the Fund stands for Small Cap Stocks. The table below shows the latest sector allocation for the index.
Source: DJIIndexes
What kind of returns should I expect if I invest in TSP S Fund?
In the charts below, you will be able to see the historical performance of the Fund over various periods. While past performance is not necessarily indicative of future performance, the data below should give you a general idea of the returns you are likely to see as an investor in the Fund. Note that the returns’ figures below assume dividend reinvestment.
Source: https://www.tsp.gov/InvestmentFunds/FundPerformance/returnSummary.html
What would be the risk profile of a hypothetical investor?
As the TSP S Fund tracks the US stock market excluding the S&P 500 Index, which comprise 500 large cap companies, the companies tracked by the Fund would be significantly smaller in market capitalization, and would tend to be less mature with higher volatility. As less mature stocks have higher growth potential, a hypothetical investor with a significant portfolio allocation into the Fund would likely be looking at obtaining higher returns for his or her portfolio, with commensurately higher risk. Hence, the hypothetical investor’s typical risk profile would likely be focused on a higher growth strategy.
What are the main selling points of the S Fund?
1. Broad US Equity Market Exposure
If you are an investor who is confident about the US Equity market as a whole in general, then investing your assets between the Fund and the TSP C Fund will allow you to gain exposure to the entire US equity market. This is good choice to diversify your equity portfolio. If you wish to approximate the total US stock market, an analysis of the various index funds available indicates that you want to split your assets between the TSP C Fund and the Fund in a roughly 80/20 split.
2. Higher Growth Potential
Small and medium-cap stocks have a growth potential that many large-cap and more mature companies simply cannot match. This is not only due to the lifecycle of the companies, but also because many of such smaller stocks are under-reported (less analyst coverage) and hence more susceptible to mispricing. It should be noted though that based on historical returns, the Fund has typically lagged even behind the TSP C Fund; as such, investors looking for higher returns may want to consider other options.
3. TSP Funds have the Lowest Expense Ratios Compared to Other Index Funds
Thrift Savings Plan Funds had an average net expense ratio of 0.029% in 2015, which is a mere $0.29 for every $1000 invested. This is much lower compared to other index funds; the table shows the expense ratios of 2 other ‘extended market’ index funds (indexes that attempt to track the overall US stock market minus the S&P 500), and you will see that the Fund’s expense ratio is by far the lowest.
| Index Fund | Expense Ratio |
|---|---|
| Vanguard Extended Markets Index | 0.22% |
| Fidelity Extended Market Index Fund | 0.10% |
Source: Respective company websites
Are there any points I should be aware of prior to making my investment in the TSP S Fund?
The main point to be aware of is that generally speaking, TSP funds lack flexibility. For instance, it only allows a maximum of 2 inter-fund transfers per month unless transferring into the TSP G Fund; this may be a negative if you wish to modify your allocation mix more frequently (particularly in the case of the Fund which is more volatile). Further, when it comes to withdrawing from the TSP itself, there are numerous restrictions such as:
- Money removed while in-service cannot be returned or repaid.
- Upon withdrawal, income taxes are payable.
- If the hardship withdrawal is used, there is a 10% penalty tax plus a further 6-month restriction on TSP account contributions.
- After leaving government service, you are only entitled to one partial withdrawal. Only full withdrawals are allowed after that.
The full list of withdrawal conditions is available at: https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals
Thank you for reading our article on the TSP S Fund. We greatly appreciate you taking time out to read this article and hope that you are armed with some background on the Fund and how it can fit it for your own financial needs. Please do take a look at our similar articles on the 4 other Thrift Savings Plan funds. See the TSP I fund page.
