The Growing Peril of Index Funds: Too Much Tech

The second edition of Jack Bogle's "Little Book of Common Sense Investing" came out this last October. It goes into detail in evaluating active investment such as what's being recommended in this article v.s. passive investment.

Plainly put, I've yet to see any compelling evidence that the supposed experts being quoted in this article can time the market as they're suggesting with their suggestion of getting out of tech stocks now.

The percentage of active management firms that can beat the index funds even before you factor in their high fees is so miniscule that random chance could account for those low numbers.

The market's almost definitely heading for a bit of a crash in a few years, but it's instructive to look at how passive v.s. active investing did in 2008 (detailed in this book) to see how much these supposed experts really know.

Re: The Growing Peril of Index Funds: Too Much Tech

#6

Post by lykr0n » Thu, Dec 28, 2017, 7:17 PM UTC

stcredzero wrote: post #2

Aren't there any broad non-tech index funds?

Vanguard has a lot of sector specific funds, such as VPU, VNQ, VAW, VIS, VDE, and others. But a lot of the funds track by Market Cap or are Bonds

Re: The Growing Peril of Index Funds: Too Much Tech

#7

Post by notadoc » Thu, Dec 28, 2017, 7:18 PM UTC

Well you could always avoid the tech heavy indices, but then you're sort of actively managing your positions rather than letting it be purely passive.

Theoretically, is not another growing peril of indexing that it removes incentives for companies to behave well or outperform, since if they're part of an index their shares will be bought automatically by retirement plans and investors anyway, irregardless of performance or competency?

And yet another theoretical peril question would be, if everyone is indexing, it surely must lose it's efficacy because it is no longer efficient, will indexing then not underperform? I suspect if or when that happens, active management will regain interest.

Indexing by the masses is a fairly new trend, it will be interesting to see how the markets handle the behavior long term.

Re: The Growing Peril of Index Funds: Too Much Tech

#8

Post by hendzen » Thu, Dec 28, 2017, 7:19 PM UTC

stcredzero wrote: post #2

Aren't there any broad non-tech index funds?

$SPXT (SPY-ex tech sector) would qualify, but it has almost no volume, so I would recommend against trading it. You could construct something roughly equivalent by going long x shares $SPY and then going short ~0.238 * x shares of $XLK.

Re: The Growing Peril of Index Funds: Too Much Tech

#9

Post by brndnmtthws » Thu, Dec 28, 2017, 7:22 PM UTC

This is an inherent property of all market cap weighted indexes. An alternative approach is equal weighted indexes, which have historically outperformed market cap weighted indexes. There's no free lunch though: this is a case of your typical risk/reward tradeoff. Equal weighted funds are more risky (volatile), but have higher historic returns than market cap weighted funds.

Some of them feature equal weighting across industry sectors as well as amongst separate companies. Here's an example of one (also note the high fees): https://www.guggenheiminvestments.com/etf/fund/rsp-guggenhei...

I personally just stick with VTI and VXUS for stocks (excluding my Airbnb & other startup shares), but I also have about 50% of my net worth in crypto (and I remain bullish).

Re: The Growing Peril of Index Funds: Too Much Tech

#10

Post by brndnmtthws » Thu, Dec 28, 2017, 7:29 PM UTC

notadoc wrote: post #7

Well you could always avoid the tech heavy indices, but then you're sort of actively managing your positions rather than letting it be purely passive. Theoretically, is not another growing peril of indexing that it removes incentives for companies to behave well or outperform, since if they're part of an index their shares will be bought automatically by retirement plans and investors anyway, irregardless of performa…

This is not quite correct. There are other weighting methods (specifically, equal weighting) which would prevent this situation, whilst still remaining passive.