VTI wrote: ↑Sat Dec 04, 2021 4:36 pm
These days, so many IPOs (and SPACs) seem like toys of the elite. By buying total market funds, I can't shake the sense that I'm bailing out early-stage Silicon Valley investors and funding their social activism.
Index front-running is an issue for S&P 500 funds. (Once a company is announced for inclusion in the S&P 500, its stock price is immediately driven up by investors who know giant S&P 500 funds are about to issue
huge market buy orders.)
However, for total market funds and the new, illiquid stocks they need to buy, "public market front-running" might be an even greater issue! Why should I want to blindly buy companies being dumped by elite early-stage investors?
Could someone please talk some sense into me?
There is no such thing as a perfect investment. One can find flaws in just about anything.
Frontrunning. Much less of an issue than it used to be as Index Funds as Vanguard has become quite skilled at trading. This is what Morningstar says:
Over the trailing one-, three-, five-, and 10-year periods ending December 2020, each share class of the fund trailed the S&P 500 by an amount approximating its annual expense ratio.
My guess is that revenue from portfolio lending has offset whatever losses there are from front running by traders. Also the expenses on the Vanguard 500 Index fund Admiral shares are only 0.04% a year. Four basis points, that's it.
The Vanguard 500 Index Fund remains an excellent investment.
It is true that the S&P 500 and Total Stock Market Indexes are a bit top heavy with the Mega-cap High Tech stocks but these indexes have historically been top heavy with the most successful companies in America. The top heavy effect has at times been higher in the past than it is now. It is something that I am concerned about too, the "problem" can be solved with mild Value tilting within the portfolio, that is what I am doing myself.
About 1/2 of my portfolio is indexed and when you count the individual stocks that are held but rarely traded, probably 60% of my portfolio is effectively passive. I own active funds with the other 40%. Not quite 30% of my retirement portfolio is managed by American Century Private Client Group Cautious Portfolio, the managers there do a bit of tactical asset allocation but their tactical bets are relatively small. Their approach right now is to be right in the middle between Value and Growth. So if you are right, if the Stock Market is experiencing too much speculation, I should outperform the broad market portfolio in the future a bit just as I have been trailing a broad market Index portfolio a bit since 2009. I think the Large Growth trend in the market is coming to an end but still too early to know for sure.
Over time, I would expect a Value tilted strategy to be about even with a Total Market Index strategy using the 4 "Totals": Total Stock Market Index, Total International Stock Index, Total Bond Market Index, and Total International Bond Index. If factor premiums still exist, my expectation is that a factor tilted portfolio would outperform a "Total Index" portfolio by 0.50% to perhaps 1.00% a year over very long periods of time. The jury is out whether those factor premiums of Size, Value, Momentum, Quality/Profitability, and Low Volatility still exist. So much has been published and so much money is chasing those premiums, they may have gone away, hard to say if that is temporary or permanent. My view is that the "Death of Factors" is temporary.
Even if you believe in factor premiums, a rational case can be made for not bothering with all of that and sticking to a 3 or 4 Fund portfolio of the "Total" funds. Over time, the market itself will deliver good returns. I believe in factor premiums myself but my expectations are modest, if I can squeeze an extra 0.50% a year, I will take it. For me to get that, I would have to see a great Value boom for a decade or more. The costs of implementation can overcome whatever performance premiums are achieved.
A fool and his money are good for business.