Does VT/VTI sufficiently cover possible upcoming market transformations?

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etfan
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Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by etfan »

In terms of "not missing the train" on possible transformations in the coming decades, do whole market index funds (such as VT/VTI) sufficiently cover all the bases?

There are fields such as clean energy, robotics, medical advancements and space travel. One may be tempted to buy index funds to cover one or more of those. For example, if you think renewable energy is going to very quickly replace fossil fuels in the 20s and 30s, then having exposure in that field might give an opportunity for rapid growth (for example ICLN).

Or is it the case that all major players in those fields are either already well represented in, say VT/VTI/SPY, or will be represented in such as they get bigger when the transformation happens? How does one quantify such opportunity cost?
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asset_chaos
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by asset_chaos »

To the extent that any of those things or any of the many possibilities you haven't mentioned are done successfully and profitably by publically listed companies, those companies will sooner or later be included in total market stock index funds or already are there. VTI is not sufficient by itself because certainly at least some of the successfull companies of the future will come from outside the US.
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anil686
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by anil686 »

Yes - would be my response. My suggestion is that you consider reading Bogle’s Common Sense on Mutual Funds - Chapter 6 “On Indexing”. He covers how a very concentrated SP500 in the late 1970s and it’s ability to overcome that....
whereskyle
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by whereskyle »

etfan wrote: Sun May 16, 2021 4:34 pm In terms of "not missing the train" on possible transformations in the coming decades, do whole market index funds (such as VT/VTI) sufficiently cover all the bases?

There are fields such as clean energy, robotics, medical advancements and space travel. One may be tempted to buy index funds to cover one or more of those. For example, if you think renewable energy is going to very quickly replace fossil fuels in the 20s and 30s, then having exposure in that field might give an opportunity for rapid growth (for example ICLN).

Or is it the case that all major players in those fields are either already well represented in, say VT/VTI/SPY, or will be represented in such as they get bigger when the transformation happens? How does one quantify such opportunity cost?
It seems to have given investors their fair share of the social media, streaming media, smartphone, cloud services, and driverless-car revolutions pretty well given the current market leaders who dominate VT and VTI, so, yes, I expect it to give investors their fair share of any future revolutions that earn profits for publicly traded corporations. I believe Warren Buffett's most recent comments to Berkshire shareholders about the oil giants who dominated the market 30 years ago, and the inevitability of change in market leadership, reflect his continued appreciation for the elegance of index investing.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
UpperNwGuy
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by UpperNwGuy »

OP, I don't understand your question. To turn it around, why wouldn't the growth of new transformational industries be reflected in total market indices?
invest2bfree
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by invest2bfree »

etfan wrote: Sun May 16, 2021 4:34 pm In terms of "not missing the train" on possible transformations in the coming decades, do whole market index funds (such as VT/VTI) sufficiently cover all the bases?

There are fields such as clean energy, robotics, medical advancements and space travel. One may be tempted to buy index funds to cover one or more of those. For example, if you think renewable energy is going to very quickly replace fossil fuels in the 20s and 30s, then having exposure in that field might give an opportunity for rapid growth (for example ICLN).

Or is it the case that all major players in those fields are either already well represented in, say VT/VTI/SPY, or will be represented in such as they get bigger when the transformation happens? How does one quantify such opportunity cost?
yes and no. If you make a sector bet then you will see the best bang for the buck. Last 6 months financials returned close to 100%. Whereas a VT investor got may be 10% return.

Many of us don't have so much conviction on these technologies.

I was a big investor in electric technologies in 2012. I saw one of my investments A123 systems go up in smoke.
It took 11 years for hordes to get a liking for the emerging technologies. All early adopters can blow up.

So you need to invest in them and hold onto them for many years even if your investment is a dog.
95% VT, 5% vgsh
Johnathon Livingston
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by Johnathon Livingston »

Index funds will cover developments occurring in the market they are indexed to. I think the question you have is more weighted (pun intended) to whether such coverage is “sufficient.” I think this question goes to the market cap weighting of companies more than anything else. If the transformative company has a large market cap weight (e.g. Apple), then yeah you’ll get a lot of that benefit immediately. If the company is small, then it will take more time for those gains to become reflected in its market weight, but you’ll eventually receive some benefit from it. To amplify the gains you’d have to engage in portfolio tilts. That carries with it it’s own risks akin to stock picking. Not for me. I just buy the hay stack and carry on with other things. But some people like to play the tilt game.
Paradise
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by Paradise »

I feel like everything that you covered in terms of stuff that could be big on the horizon is already priced in. You’re not more informed than the market.
50% VTI | 20% VXUS | 20% BND | 10% QQQ
Topic Author
etfan
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by etfan »

asset_chaos wrote: Sun May 16, 2021 6:50 pm ...VTI is not sufficient by itself because certainly at least some of the successfull companies of the future will come from outside the US.

Good point. Yet another reason to resent holding VTI instead of VT. :(
Topic Author
etfan
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by etfan »

Johnathon Livingston wrote: Sun May 16, 2021 8:51 pm ... If the company is small, then it will take more time for those gains to become reflected in its market weight, but you’ll eventually receive some benefit from it. To amplify the gains you’d have to engage in portfolio tilts...
Makes sense. I guess it's just a question of how much is lost waiting for said sectors to be reflected in VTI.

And like another commenter said, increasing my exposure (outside VTI) assumes that I know better than the market. I have to admit: I may be guilty of that. It does seem, for example, that the world is migrating to renewables at a rate that doesn't seem properly emphasized in VTI.
Paradise
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by Paradise »

etfan wrote: Sun May 16, 2021 9:29 pm
Johnathon Livingston wrote: Sun May 16, 2021 8:51 pm ... If the company is small, then it will take more time for those gains to become reflected in its market weight, but you’ll eventually receive some benefit from it. To amplify the gains you’d have to engage in portfolio tilts...
Makes sense. I guess it's just a question of how much is lost waiting for said sectors to be reflected in VTI.

And like another commenter said, increasing my exposure (outside VTI) assumes that I know better than the market. I have to admit: I may be guilty of that. It does seem, for example, that the world is migrating to renewables at a rate that doesn't seem properly emphasized in VTI.
I don’t think that you or I know that well enough to put money on the line for it. Having said that, renewables have been beating traditional energy companies for a while now. Their future earnings in the most likely scenario are already priced in. That’s all reflected in VTI. The point of an efficient market is that all data is available to everyone... and the big players are way better at evaluating the data than us. We stay on the sidelines and cheer everyone on. Having said that, I don’t think that anyone will blame you for putting a little bit of fun money into a more risky speculation. The things you mentioned are at least better than Bitcoin. :D I just wouldn’t touch any industry like that unless I knew it inside and out.
50% VTI | 20% VXUS | 20% BND | 10% QQQ
YRT70
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by YRT70 »

etfan wrote: Sun May 16, 2021 4:34 pm In terms of "not missing the train" on possible transformations in the coming decades, do whole market index funds (such as VT/VTI) sufficiently cover all the bases?

There are fields such as clean energy, robotics, medical advancements and space travel. One may be tempted to buy index funds to cover one or more of those. For example, if you think renewable energy is going to very quickly replace fossil fuels in the 20s and 30s, then having exposure in that field might give an opportunity for rapid growth (for example ICLN).

Or is it the case that all major players in those fields are either already well represented in, say VT/VTI/SPY, or will be represented in such as they get bigger when the transformation happens? How does one quantify such opportunity cost?
Ben Felix does imo an excellent job answering that question.

"Exciting new technologies, and the companies that create them, seem like obvious investment opportunities. Why wouldn’t you want to invest in the companies leading a new world-changing technological paradigm?"
https://www.youtube.com/watch?v=UZnVt_CvL3k
NiceUnparticularMan
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Re: Does VT/VTI sufficiently cover possible upcoming market transformations?

Post by NiceUnparticularMan »

So any companies with disruptive technologies that end up grabbing market share from stodgy incumbents will eventually be reflected in market cap-weighted indices.

Eventually.

Theoretically, though, what is going to happen is you are going to buy a lot of those stodgy incumbents before that happens, and little if any of those disruptive upstarts before it happens. Then as it happens, you will be selling the stodgy incumbents at gradually increasing losses from where you bought in, and gradually buying more of the disruptive upstarts only as their price increases. Hmm.

So, you might think to yourself, why don't I, say, overweight small growth stocks, which implicitly are companies the market thinks have a bright future which has not been realized yet. And maybe even short large value stocks to do that, since the market seems to think those might be stodgy companies without such a bright future.

As it turns out, that historically would be an awful, awful plan.

The basic problem is even if it is true some TYPE of new technology or such is going to grow rapidly in the future, knowing exactly which companies will ride that wave up is typically hard! But nonetheless, by the time they are publicly-listed, at least, they attract the sort of investor that I would call risk-seeking, others might call lottery ticket investors, or get-rich-quick investors, or so on. The basic point being these particular investors will bid up the speculative price of a lot of these companies, and a bunch will end up disappointing. And so unless you feel like you can beat these other investors in evaluating who is going to win and who is going to lose this cutthroat tournament, just getting their average results is not likely to be a good result.

Meanwhile, a lot of those stodgy incumbents feeling pressure from disruptive technologies arguably get TOO beat up on price in these circumstances. Because at least sometimes, they are not in fact so stodgy. Sometimes, they can adjust their businesses. And in fact, if they have a big old pile of assets, they may well be able to basically buy the technology/businesses they need to beat off upstart challengers--possibly before those technologies/businesses are investable through publicly listed stocks.

Long story short--I think if you really know what you are doing, and can get into the very early stages of investing in potentially disruptive companies before they are publicly listed . . . maybe you can do something interesting investing in this space, including in cases where you get your return by ultimately selling out to some big listed company.

But by the time companies are publicly listed, it is probably too late. The risk-seeking/lottery-ticket types will have bid up their price, and if anything you should more be thinking about how to underweight them, not buy more than you would find in a total market index.
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