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.
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:
- Still Sure Indexing is Right for You?
- Another Legendary Investor Sounds the Alarm on Investments that Have Taken Over Nearly Half the Stock Market
- The Problem With Mutual Funds Today
- New Correlation Meltdown Could Punish the Indexing Miracle
- My Concerns as Money Piles Up at Vanguard
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.
