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This is Why Vanguard is Too Big

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If you want clear evidence of why Vanguard is too big, then look no further than the money flow into passive index funds. When investors are lulled to sleep by a bull market, they dream about things like early retirement, vacations, and second homes. What they tend to miss is that reversion to the mean is a fact of life. You can take my word for it and that of the father of index funds Jack Bogle.

Index funds, like those built based on the S&P 500, weight the shares of a small number of the biggest companies heavier than those of small companies. That’s the ugly truth behind the S&P 500. For instance, the top 10 S&P 500 stocks are:

Company Symbol Weight Yield
Microsoft Corporation MSFT 4.2% 1.34%
Apple Inc. AAPL 3.9% 1.40%
Amazon.com Inc. AMZN 3.0% 0.00%
Facebook Inc. Class A FB 1.8% 0.00%
Berkshire Hathaway Inc. Class B BRK.B 1.6% 0.00%
JPMorgan Chase & Co. JPM 1.5% 3.02%
Alphabet Inc. Class C GOOG 1.5% 0.00%
Johnson & Johnson JNJ 1.4% 2.93%
Exxon Mobil Corporation XOM 1.2% 4.72%
Visa Inc. V 1.2% 0.57%

Despite the inclusion of shares from 500 companies, the market-cap-weighted S&P 500’s top ten stocks make up over 21% of the index. Of those top 10 stocks, four pay no dividends whatsoever. Many of the shares offer meager yields, with all but one, Exxon Mobil, offering yields lower than the 3.1% produced by Young Research’s globally diversified Retirement Compounders®.

Index funds mimicking the S&P 500 build in this disproportionate weighting of low-and-no-yielding shares. Buying them exposes you to all the risk that goes along with heavy weightings in low yield tech shares. There are better ways to invest, such as with international diversification. You can see below that, over time, the Retirement Compounders® portfolio has outperformed the S&P 500.

So Why is Vanguard Too Big?

Vanguard is loaded with passive index funds, and those funds are owned by investors who have no idea what they’ve gotten into. With every TV investment guru shouting about index funds, and fund companies marketing them as foolproof, it’s a recipe for disaster.

I’ve been warning investors about the dangers of passive indexing for some time. You can read some of what I have written here:

At The Wall Street Journal Dawn Lim explains Bogle’s concerns about the future of index funds, writing:

But the apostle of the index fund became more concerned about the unintended consequences of indexing’s success in his final years. If index giants kept growing at the same clip, it would be a matter of time before governments tried to break them up, the late Mr. Bogle told close associates. He worried this would put the future of the index fund in jeopardy.

Read more here.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com