"What Is Vanguard 500 Index's Achilles Heel?"
- Taylor Larimore
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"What Is Vanguard 500 Index's Achilles Heel?"
Bogleheads:
Morningstar Fund Analyst Reports normally require a Morningstar subscription. Their Reports usually contain useful information about a fund. This Report is free:
What Is Vanguard 500 Index's Achilles Heel?
Edit: Despite the click-bait title, the article is highly favorable of the Vanguard 500 Index fund and gives it a GOLD analyst rating.
Best wishes
Taylor
Morningstar Fund Analyst Reports normally require a Morningstar subscription. Their Reports usually contain useful information about a fund. This Report is free:
What Is Vanguard 500 Index's Achilles Heel?
Edit: Despite the click-bait title, the article is highly favorable of the Vanguard 500 Index fund and gives it a GOLD analyst rating.
Best wishes
Taylor
Last edited by Taylor Larimore on Mon Aug 07, 2017 1:11 pm, edited 1 time in total.
"Simplicity is the master key to financial success." -- Jack Bogle
Re: "What Is Vanguard 500 Index's Achilles Heel?"
There is no Achilles Heel. This is a perfectly good investment.
A fool and his money are good for business.
Re: "What Is Vanguard 500 Index's Achilles Heel?"
I don't know if I would call them Achilles Heel, but a couple limitations of any S&P 500 index funds:
1) Market cap weighted
2) No defensive measures in down markets
1) Market cap weighted
2) No defensive measures in down markets
- Lieutenant.Columbo
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Re: "What Is Vanguard 500 Index's Achilles Heel?"
90% of its risk is concentrated in one single factor: betaTaylor Larimore wrote:What Is Vanguard 500 Index's Achilles Heel?
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!
Re: "What Is Vanguard 500 Index's Achilles Heel?"
No mid cap/small cap exposure.
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Re: "What Is Vanguard 500 Index's Achilles Heel?"
The analysis makes two potentially negative points.
1) The Vanguard 500 doesn't perform much differently than funds based on other large cap indexes. Ok, that's not even really a negative point. It's basically a truism - Vanguard 500 is similar to the funds it is similar to.
2) Market cap weight results in high sector concentrations of sectors the overall market likes, so it's susceptible to following sector bubbles and experiencing the consequences of that. Basically, it has potential to underperform the rest of the market.
As usual with Morningstar's index fund analyses, I feel like they're just filling space on the page. Index funds don't leave them much substance to write about compared to active funds.
1) The Vanguard 500 doesn't perform much differently than funds based on other large cap indexes. Ok, that's not even really a negative point. It's basically a truism - Vanguard 500 is similar to the funds it is similar to.
2) Market cap weight results in high sector concentrations of sectors the overall market likes, so it's susceptible to following sector bubbles and experiencing the consequences of that. Basically, it has potential to underperform the rest of the market.
As usual with Morningstar's index fund analyses, I feel like they're just filling space on the page. Index funds don't leave them much substance to write about compared to active funds.
- abuss368
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Re: "What Is Vanguard 500 Index's Achilles Heel?"
No total market exposure?
John C. Bogle: “Simplicity is the master key to financial success."
Re: "What Is Vanguard 500 Index's Achilles Heel?"
But beta is the only factor to consistently produce positive value over time. All of the others are more cyclical & create as alot more volatility than return.Lieutenant.Columbo wrote:90% of its risk is concentrated in one single factor: betaTaylor Larimore wrote:What Is Vanguard 500 Index's Achilles Heel?
Packer
Buy cheap and something good might happen
- Lieutenant.Columbo
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Re: "What Is Vanguard 500 Index's Achilles Heel?"
isn't one also exposed to beta when targeting small and/or value factors?packer16 wrote:But beta is the only factor to consistently produce positive value over time. All of the others are more cyclical & create as alot more volatility than return.Lieutenant.Columbo wrote:90% of its risk is concentrated in one single factor: betaTaylor Larimore wrote:What Is Vanguard 500 Index's Achilles Heel?
Packer
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!
Re: "What Is Vanguard 500 Index's Achilles Heel?"
Yes, but as today's WSJ front page article (h[url]ttps://www.wsj.com/articles/hot-stock-rally-te ... 1502020804[/url] for those with access) proves, Larry Swedroe was wrong*!Lieutenant.Columbo wrote:isn't one also exposed to beta when targeting small and/or value factors?
*attempt at humorous reference for those who were in recent Bogle was Right thread
- ruralavalon
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Re: "What Is Vanguard 500 Index's Achilles Heel?"
It is market cap weighted, so the investor is certain to participate in market bubbles and suffer when they burst.Taylor Larimore wrote:Bogleheads:
Morningstar Fund Analyst Reports normally require a Morningstar subscription. Their Reports usually contain useful information about a fund. This Report is free:
What Is Vanguard 500 Index's Achilles Heel?
Best wishes
Taylor
Still it is an an excellent fund to use for broad diversification in U.S. stocks with a low expense ratio.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
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Re: "What Is Vanguard 500 Index's Achilles Heel?"
Technically true, although there's been more than one discussion pointing out how extremely close Vanguard 500 tends to track to Vanguard total stock market. And investing in an S&P 500 fund doesn't preclude using other funds to invest in the rest of the market, including international if you want.abuss368 wrote:No total market exposure?
Anyways, the analysis title is a leading rhetorical question. You could almost call it clickbait, except Morningstar writes these analyses of every major fund available, and there was very little they could say critical of an index fund that tracks extremely close to its index.
The question is answered in the analysis. The answer is just so underwhelming it seems absurd to call it an Achilles heel...unless your life depends on not getting hit by the poisoned arrow of performance similar to the rest of large cap blend funds during a decline.
If so, perhaps it might be wise to cover that vulnerable heel with some bonds.
Bingo. 20 word answer and done. If all you wanted to know was the answer to the title question, you don't need to read the 1446 word long article.ruralavalon wrote:It is market cap weighted, so the investor is certain to participate in market bubbles and suffer when they burst.
Re: "What Is Vanguard 500 Index's Achilles Heel?"
+1 and if I was just starting out and had to buy just 1 fund either this one or one with blend of a bond index thrown in would be a good place to start.ruralavalon wrote:It is market cap weighted, so the investor is certain to participate in market bubbles and suffer when they burst.Taylor Larimore wrote:Bogleheads:
Morningstar Fund Analyst Reports normally require a Morningstar subscription. Their Reports usually contain useful information about a fund. This Report is free:
What Is Vanguard 500 Index's Achilles Heel?
Best wishes
Taylor
Still it is an an excellent fund to use for broad diversification in U.S. stocks with a low expense ratio.
Then later one could easily tilt it away from large growth by mixing in some small / value index funds.
Adapt or perish
- Taylor Larimore
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One fund or three
.If I was just starting out and had to buy just 1 fund either this one or one with blend of a bond index thrown in would be a good place to start.
Then later one could easily tilt it away from large growth by mixing in some small / value index funds
Top99%:
Why not simply start out, and hold, a single Total Stock Market Index Fund (VTSMX).
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
- triceratop
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Re: One fund or three
To be better diversified (Jack Bogle says to buy the haystack rather than finding the needle), consider buying the Vanguard Total World Stock Market fund (VT / VTWSX -- best to use the ETF for cost reasons) instead.Taylor Larimore wrote:.If I was just starting out and had to buy just 1 fund either this one or one with blend of a bond index thrown in would be a good place to start.
Then later one could easily tilt it away from large growth by mixing in some small / value index funds
Top99%:
Why not simply start out, and hold, a single Total Stock Market Index Fund (VTSMX).
Best wishes.
Taylor
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
- Taylor Larimore
- Posts: 32839
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Re: "What Is Vanguard 500 Index's Achilles Heel?"
triceratop:To be better diversified (Jack Bogle says to buy the haystack rather than finding the needle), consider buying the Vanguard Total World Stock Market fund (VT / VTWSX -- best to use the ETF for cost reasons) instead.
I answered your post in the first page of The Three-Fund Portfolio thread. This is what I wrote:
Best wishes.I have considered simplifying The Three Fund Portfolio to a Two Fund Portfolio (Total World + Total Bond Market). However, keeping Total U.S. Stock Market and Total International Stock Market separate has several advantages (edited 4-21-2017)
Usually lower Fund/ETF Expense Ratios: Total Stock Market (VTSAX & VT) = .05%; Total International (VTIAX & VXUS) = .11%; Total World (VTWSX = .21%; VT = 0.11%).
Lower Turnover (hidden cost): Total Stock Market = 4.0%; Total International = 3.1%; Total World = 14.8%
Tax Efficiency (5 years): Total Stock Market =.56; Total International = 1.09; Total World = .82
Better diversification (lower risk): Total U.S. Stock Market and Total International (combined) hold 9,773 stocks. Total World holds 7,774.
More U.S. stocks: Total World contains approximately 53% U.S. stocks. Many authorities, including Mr. Bogle, believe this is inadequate for U.S. investors.
Flexibility: The ratio between U.S. Total Stock Market and Total International is flexible for investors wherever they live in the world or whatever their desire.
Admiral Shares: Unlike Total Stock Market and Total International, Total World has no Admiral shares.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
- triceratop
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Re: "What Is Vanguard 500 Index's Achilles Heel?"
Taylor,
Expense Ratios: Yes, you're paying 2-3bp extra for the simplicity of 1 fund instead of two.
Turnover: Question is how the funds track their index, not simply turnover. As of July 31, the fund lagged its index by only 1bp, and that includes fees. I disagree that this matters to the extent you claim it does (by listing it as a negative for total world).
Tax Efficiency: I don't believe the morningstar tax efficiency numbers that you use, at all. It's simply not correct for most investors, and I'm fairly certain they ignore the foreign tax credit. I do my own calculations. See my calculations here (can use VTI and VXUS to simulate VT). The results depend on the investor but disagree sharply with these numbers.
Better Diversification: True, but these are market cap-weighted funds so fewer stocks are needed to represent the bottom of the market dominated by larger companies.
More U.S. Stocks: Doesn't this directly contradict the previous point about better diversification? Buy the haystack, a wise man once said.
Flexibility: On the contrary, the Total World Stock Market is appropriate no matter where in the world the investor resides. A home bias is harder justify when one lives abroad.
Admiral Shares: so buy the ETF.
Expense Ratios: Yes, you're paying 2-3bp extra for the simplicity of 1 fund instead of two.
Turnover: Question is how the funds track their index, not simply turnover. As of July 31, the fund lagged its index by only 1bp, and that includes fees. I disagree that this matters to the extent you claim it does (by listing it as a negative for total world).
Tax Efficiency: I don't believe the morningstar tax efficiency numbers that you use, at all. It's simply not correct for most investors, and I'm fairly certain they ignore the foreign tax credit. I do my own calculations. See my calculations here (can use VTI and VXUS to simulate VT). The results depend on the investor but disagree sharply with these numbers.
Better Diversification: True, but these are market cap-weighted funds so fewer stocks are needed to represent the bottom of the market dominated by larger companies.
More U.S. Stocks: Doesn't this directly contradict the previous point about better diversification? Buy the haystack, a wise man once said.
Flexibility: On the contrary, the Total World Stock Market is appropriate no matter where in the world the investor resides. A home bias is harder justify when one lives abroad.
Admiral Shares: so buy the ETF.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
- Taylor Larimore
- Posts: 32839
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Vanguard Total World ?
triceratop:
You raise good points.
People of good-will can disagree without being disagreeable.
Best wishes.
Taylor
You raise good points.
People of good-will can disagree without being disagreeable.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle