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The Growing Peril of Index Funds: Too Much Tech
- stcredzero 9y agoAren't there any broad non-tech index funds?
- jameslk 9y agoVDC tracks consumer staples, which doesn't include any of the major tech companies.
- yellowstuff 9y agoLooks like Pro Shares has S&P 500 ex Tech: http://www.proshares.com/funds/spxt.html http://www.proshares.com/funds/spxt.html
- hendzen 9y agoADV of 311 shares according to Yahoo. Do not buy.
- lykr0n 9y agoVanguard has a lot of sector specific funds, such as VPU, VNQ, VAW, VIS, VDE, and others. But a lot of the funds track by Market Cap or are Bonds
- hendzen 9y ago$SPXT (SPY-ex tech sector) would qualify, but it has almost no volume, so I would recommend against trading it. You could construct something roughly equivalent by going long x shares $SPY and then going short ~0.238 * x shares of $XLK.
- jameslk 9y agoI don't think shorting would be a very good strategy for passive, long term investors due to the associated costs (margin, dividend payments) and the unlimited risk.
- hendzen 9y agoThere isn't unlimited risk because the exposure to tech is hedged out by the opposing long/short positions (as are the dividend payments). Agreed that this isn't practical for the average investor though.
- AnimalMuppet 9y agoThere are index funds that track the Russell 2000. This is a smaller-cap index. I suspect that it has some tech in it, but I also suspect that it is less tech-heavy than the S&P 500.
- avar 9y agoThe second edition of Jack Bogle's "Little Book of Common Sense Investing" came out this last October. It goes into detail in evaluating active investment such as what's being recommended in this article v.s. passive investment. Plainly put, I've yet to see any compelling evidence that the supposed experts being quoted in this article can time the market as they're suggesting with their suggestion of getting out of tech stocks now. The percentage of active management firms that can beat the index funds even before you factor in their high fees is so miniscule that random chance could account for those low numbers. The market's almost definitely heading for a bit of a crash in a few years, but it's instructive to look at how passive v.s. active investing did in 2008 (detailed in this book) to see how much these supposed experts really know.
- bitxbit 9y agoIncrease in passive/beta investing is not necessarily good for the economy. We are going through an extraordinary period for levered beta.
- sliverstorm 9y agoThis isn't about timing the market, it's about rebalancing and maintaining a good diversity of exposure to various sectors. Rebalancing is not antithetical to passive investing.
- dbecker 9y agoThis article is talking about diversification to reduce risk, which is unrelated to "timing the market" and which can be consistent with passive investing.
- avar 9y agoSome investors described in the article moved from market cap weighted indexes to ones that were disproportionately weighted to disfavor tech stocks, they believe that they're overvalued and that they can get out earlier than everyone else. That's trying to time the market. The firms mentioned in the article will be happy to charge you much higher fees than Vanguard for questionable longer term returns. It's basically a PR piece for managed investment.
- notadoc 9y agoWell you could always avoid the tech heavy indices, but then you're sort of actively managing your positions rather than letting it be purely passive. Theoretically, is not another growing peril of indexing that it removes incentives for companies to behave well or outperform, since if they're part of an index their shares will be bought automatically by retirement plans and investors anyway, irregardless of performance or competency? And yet another theoretical peril question would be, if everyone is indexing, it surely must lose it's efficacy because it is no longer efficient, will indexing then not underperform? I suspect if or when that happens, active management will regain interest. Indexing by the masses is a fairly new trend, it will be interesting to see how the markets handle the behavior long term.
- brndnmtthws 9y agoThis is not quite correct. There are other weighting methods (specifically, equal weighting) which would prevent this situation, whilst still remaining passive.
- howlin 9y agoYou would have to actively rebalance to keep equal weighting, so it is not as passive as typical market cap weighting.
- brndnmtthws 9y agoYou still have to rebalance market cap weighted funds, just much less so. Market cap weighted is indeed more efficient, but that's only assuming most stocks don't do things like pay dividends.
- pedrocr 9y agoI'd argue an equal weighted index is no longer passive. You're actively making a bet that smaller companies will outperform bigger companies. Someone else will be taking the other side of that bet. Me with my cap weighted index will get the average of the two and be actually passive.
- brndnmtthws 9y agoThis is an inherent property of all market cap weighted indexes. An alternative approach is equal weighted indexes, which have historically outperformed market cap weighted indexes. There's no free lunch though: this is a case of your typical risk/reward tradeoff. Equal weighted funds are more risky (volatile), but have higher historic returns than market cap weighted funds. Some of them feature equal weighting across industry sectors as well as amongst separate companies. Here's an example of one (also note the high fees): https://www.guggenheiminvestments.com/etf/fund/rsp-guggenheim-sp-500-equal-weight-etf https://www.guggenheiminvestments.com/etf/fund/rsp-guggenhei... I personally just stick with VTI and VXUS for stocks (excluding my Airbnb & other startup shares), but I also have about 50% of my net worth in crypto (and I remain bullish).
- hendzen 9y agoWhat you want is an equal risk weighted SPY ETF - where each component is weighted such that the contribution to total volatility is equalized. This can be done using some off the shelf risk models from firms like MSCI. There was such an ETF (ERW), but it never really took off, and it no longer trades. Unfortunately these methods will just remain available to only more sophisticated market participants.
- brndnmtthws 9y agoThere's still a lot of opportunity for new types of passive index funds, using methods like you suggest. Maybe someone will start an up.
- pedrocr 9y agoThat's stretching the definition of passive investing. What the OP describes is an active strategy like any other. That you can automate it and wrap it in an ETF doesn't make it passive.
- matt_wulfeck 9y agoMy hunch tells me specialized funds won’t beat cap weighted indexes from places such as Vanguard because of fees.
- autokill 9y agohttp://archive.is/qPANt http://archive.is/qPANt
- JoshTko 9y ago"Tech" in this case is an overly broad classification. Apple, Amazon, and Facebook are all very different businesses and should not have correlated performance.
- bpicolo 9y agoLogistics, hardware, advertising. All very different for sure. Every successful business has to be “tech” in this century. Tech is how you achieve high scale
- repsilat 9y agoYeah, if "tech" just means "many employees are programmers" or "has a large online presence" it seems obvious that tech is going to become a larger portion of the market, and rebalancing to cut down the "overweight" tech in your portfolio runs directly counter to what passive cap-weighted investing is about -- having investments that follow what has won in the past and is expected to win in the future.
- module0000 9y agoThe growing peril is only for long positions. Peril for long positions is profit for short positions. Seeing this article advising "reducing your exposure to tech by selling your tech stocks" assumes that you have no choice to participate other than buying. They are looking at half of the market(buy-side) and ignoring the equal-sized selling-side of the market. Stocks going down == Short the market. Stocks going up == long the market. The direction is unimportant, the volatility is absolutely important - and there is an awful lot of it(volatility) at the moment.
- astrange 9y agoAre you suggesting an index fund that passively shorts everything? I don’t think that’s in my 401k. (I use Hedgeable which is the most complex robo-advisor, but as they say they hedge long instead of using options. Please sign up, I’d be inconvenienced if they went out of business!)
- module0000 9y agoI'm suggesting if the article has any conviction for moving out of tech, then the smart play is not to move out but to short. The language of "reduce exposure" is not what you should hear from your advisor/broker. You don't reduce exposure, you reduce risk by opening short hedges or opening short outright. If these people are tied up long in QQQ(the article references this instrument, which is an amateur hour NQ100 ETF), then risk of tech bust is managed by shorting NQ as a hedge.
- rsync 9y ago"The direction is unimportant, the volatility is absolutely important - and there is an awful lot of it(volatility) at the moment." I am not sure what you mean by this - the asset market in general and the stock market in particular is historically non-volatile right now. Almost all asset classes are in lock-step correlation and fear indexes like the VIX are in such permanent languish that shorting the VIX has been one of the more profitable strategies for trading desks over the last few years.
- zitterbewegung 9y agoThis looks like a PR piece to make people afraid of investing in the S&P. Some people have suggested thought that since investing in index funds makes the companies that are apart of the index fund to not compete with each other due to their shareholders. I'm not sure if the previous statement is even valid or real.
- Analemma_ 9y agoThere have a lot of hit jobs on index funds in the last few years, often published in the Wall Street Journal. Active fund managers are getting really scared that money continues pouring out of them and into Vanguard as it becomes common knowledge that actively managed funds almost never beat index funds net of fees. https://news.ycombinator.com/item?id=12368136#12368902 https://news.ycombinator.com/item?id=12368136#12368902 <- I said this a year ago and it's going to continue
- greggarious 9y agoBalancing your portfolio with domestic (US) and international index funds would seem to take care of that since. I'm currently 60/20/20 US/International/Bonds IIRC. If the US market is mostly tech and tech bottoms out when I want to retire, I won't be completely wiped out. I also plan to semi-retire early and work a lower stress job between 40/50 and 65 so I'll be less under the gun than someone who needs sell stock and can't tighten their belt.