Sort of Small Cap and Incomplete International: Going Inside TSP’s Most Misunderstood Funds

The TSP’s I and S Funds may no be all that they appear to be on the surface.

I admit that I’ve wanted to write on this topic for a while, but as long as the Federal Retirement Thrift Investment Board was working on an index change for the I Fund, I felt it best to wait.

Let’s begin with some basics. The five TSP core funds are considered index funds. What is an index fund?


An index fund is a type of mutual fund or exchange-traded fund that seeks to track the returns of a market index. The S&P 500 Index, the Russell 2000 Index, and the Wilshire 5000 Total Market Index are just a few examples of market indexes that index funds may seek to track.

Uh that’s great Jen. But what’s an index?

Again from

A measurement of the performance of a specific “basket” of stocks considered to represent a particular market or sector of the U. S. economy. For example, the Dow Jones Industrial Average (DJIA) is an index of 30 “blue chip” stocks of U.S. companies.

So, it is a set of data about a group of stocks or bonds designed to accurately capture the performance of the group. So, let’s look at the C Fund. Its “index” is the S&P 500 or the 500 largest publicly trades US companies. Easy.

Each of the respective equity funds (C,S and I) follow an underlying index. Seems simple, right? Not necessarily.

The S Fund

For example, the S Fund’s name implies small cap. So, one might reasonably assume that the underlying index it attempts to follow might be a domestic small cap index like the Russell 2000 index or the MSCI US Small Cap index. That is not the case.

Per its website, the TSP uses the Dow Jones US Completion Total Stock Market Index. Notice that this does not read small cap anywhere?

Per Investopedia:

The S Fund holds the same securities as the Dow Jones U.S. Completion Total Stock Market Index. This index is composed of the 4,500 companies outside of the Standard & Poor’s 500 Index that make up the rest of the Wilshire 5000 Index, the broadest of the stock indexes.

Here the devil is in the details. This definition means that the index pretty much begins where the S&P 500 ends. This top-down approach means that there are some pretty big companies in the tracking, which would typically be excluded from a true small cap allocation.

To be sure, this index contains companies that would be defined as small. So, what makes up the small cap definition? Generally speaking, companies in this class would fall between $300 million and $2 billion market capitalization.

JEN!!! You are making my head hurt. What is your POINT?!!

Simply this, the S Fund has holdings that could be outside the parameters of a small cap allocation, meaning that you need to take this into consideration when laying out your allocation based upon asset classes. I have some breakouts for this index that show 20 – 25% that could be deemed US Large Cap. If you allocate 20% to the S Fund it is possible that 4% of the mix is actually large, meaning you would inadvertently be underweighted in US Small. Since this is the highest performing asset class historically, we don’t want to underweight.

To be clear. This is not a bash of the S Fund but rather an “under the hood” look to help you make the most accurate allocation.

Again remember, S stands for “sort of small cap” and allocate accordingly.

The I Fund

Now let’s move to the “Incomplete I Fund.”

I don’t know in the era of emojis what the best way is to communicate the word “sigh.” Suffice to say I did so as I began composing this section.

Since the inception of the I Fund in 2001, the underlying index it tracks has been the MSCI EAFE index. 

Per the TSP website: “The I Fund’s investment objective is to match the performance of the MSCI EAFE (Europe, Australasia, Far East) Index.”

Needless to say, this excludes a large portion of the investment world, most notably emerging markets. Note that from 2001-2010 that this asset class posted annualized returns of 15.9% (Alliance Bernstein, June 23, 2023). Over the last 20 years, the average annualized return for this asset class is 9.7% (DFA, Dec 13, 2022). 

To its credit, the Federal Retirement Thrift Investment Board (FRTIB) diligently pursued researching upgrading the benchmark index. In 2017, the FRTIB announced that the underlying index would change to the MSCI World Ex US Index. (Take the whole world and subtract us (The US)). That process was disrupted in 2019.

Here I would like to pause and be very clear. I have no intention of writing a political piece.

Suffice to say the members of congress and the White House, for purposes that I will leave it to them to explain and justify, interfered in the work of the FRTIB resulting in federal employees waiting for an approved upgrade to the I Fund since 2017. 

Don’t sugar coat it, Jen. How do you really feel?

Nope. Not gonna do it. I’m writing this piece to inform you, not to bash others. So here’s the better news.

In November of 2023 FRTIB finally voted to adopt a new index for the I Fund utilizing the MSCI World Ex US, Ex China, Ex Hong Kong. 

To be clear, I consider this to still be an improvement over the EAFE index providing much broader exposure and diversification. However, in comparison to the World Ex-US index it remains somewhat incomplete. No matter what your opinion of China and its government and policies, it remains the world’s second largest economy.

Back to my purpose for this article. My goal is to provide you with the information to enable you to make the best and most informed decisions for your retirement planning and TSP investing.

So, if you wish to construct an international portfolio to reflect the global economy you will need to include China and Hong Kong though outside investments or to explore options through the TSP’s mutual fund window. 

To close on a good note, I want to strongly reiterate that the new index (which will be implemented on an undisclosed date this year) represents a significant improvement for our Feds. Kudos to the FRTIB for staying on task and bringing the upgrade to fruition. 

As we learned in the early 2000s with the S&P 500’s “lost decade”, international exposure is a vital piece of proper portfolio design and diversification so do not overlook the I Fund.

Though the I Fund continues to be “incomplete” it is still improved. Use the new index to your advantage.

Good luck in your journey toward the retirement and financial life you deserve. I am happy to be on the path with you.

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 Jennifer Meyer 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. The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you’re eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.

About the Author

Jennifer Meyer, CFP®, AIF®, ChFEBC℠ has over 20 years of experience, many specifically working with Feds. Growing up in a family of Federal employees, she is extremely proud to serve the Federal community. You can read additional articles for Feds by Jennifer at Serving Those Who Serve.