US stock exposure without severe Mag Seven overconcentration

[ochotona]

I've been thinking about the issue of buying S&P500 or US Total Market ETFs when Mag Seven is so overconcentrated in both of these types of funds (VOO, VTI) which are mostly in the IT space.

I think the Schwab Fundamental Index ETF equivalents may be of interest (FNDX, FNDB). They have the same universe of stocks, but different weighting schemes (from RAFI website):

RAFI™ Fundamental Indices

The RAFI Fundamental Indices use the Research Affiliates’ Fundamental Index™ methodology, which weights companies based on fundamental measures of company size (as measured by accounting variables) rather than their market capitalization.

Note it's not "value" per se... it's still "size", but it takes a more nuanced view of what "size" really means. They just want to avoid the error which always occurs at market tops of "number go up, so weighting go up, so passive investors buy it, so number go up, so weighting go up..." until something breaks which stops that feedback loop.

Example -

what is the Info Technology weighting of VTI? 34%
what is the Info Technology weighting of FNDB? 16.41%

what is the Info Technology weighting of VOO? 30.7%
what is the Info Technology weighting of FNDX? 16.87%

[foglifter]

That's a valid concern if you only have large caps in your portfolio. I use GB and feel like addition of a hefty dose of SCV helps realign the weights.

[seajay]

I prefer midcap S&P400 MDY type choice. Less inclined to have single stocks/sectors heavy weighting pulling the entire index up or down (feeds in and out of both its top and bottom).

[ochotona]

Agreed, having separate mid-cap and/or small-cap allocation is a good way to solve the over-concentration issue.

People believe the US Total Market ETFs solve that problem, but in reality, the Small and Mid Cap slices get drowned out by the Mega Caps.

[dualstow]

I always want to own Total Stock, because if some stocks are “dominating”, it’s because they went up, which is the point of buying stocks.

At some point, though, I start feeding midcap and smallcap funds to lessen that concentration, as I wait for at least some of the biggest successes to blow up, or to yield the throne to a new set of companies.

[ochotona]

If you adjust this perf chart to cover 2003 - Present (max extent),

https://stockcharts.com/freecharts/perf.php?SPY,RSP

there is literally no time period until a few months ago when SPY outperformed RSP (equal-weighted S&P500).

RSP took a relative dive around Thanksgiving 2024, SPY kept going. I think either RSP catches up, or SPY catches down. Or... "it's different this time".

[dualstow]

I own VTSAX/VTI (Total Market),
with some VIMAX (Vg midcaps) and Vg smallcaps.

But your point is well taken.

[mathjak107]

paul merriman has some value oriented ETF portfolios of all types .

very nice diversification , he is a big believer in small cap value adding alpha

https://www.paulmerriman.com/best-in-cl ... #gsc.tab=0

[Jack Jones]

RAFI™ Fundamental Indices

Rob Arnott discusses the Fundamental Indices in this podcast:

https://rationalreminder.ca/podcast/157

They seem like a reasonable substitute for market-cap weighted funds.

[boglerdude]

If you arent going to cap weight, you need to explain why Nvidia et al are mispriced by the investors looking at their numbers. Arnott's fund has slightly underperformed the market last 20 years. But theres always an issue with private managers front-running their funds when they know a rebalance is coming.

That said just bought Vanguard small value, my first heresy. Because its down 15%

[Jack Jones]

If you arent going to cap weight, you need to explain why Nvidia et al are mispriced by the investors looking at their numbers.

In the present, you have examples like Tesla where irrational people have 100% of their net worth in it because Musk is cool. In the past, you have examples like the dot com bubble.

[ochotona]

If you arent going to cap weight, you need to explain why Nvidia et al are mispriced by the investors looking at their numbers. Arnott's fund has slightly underperformed the market last 20 years. But theres always an issue with private managers front-running their funds when they know a rebalance is coming.

That said just bought Vanguard small value, my first heresy. Because its down 15%

I understand the underperformance of Arnott's RAFI index... I brought it up as an example of a different way to weight as opposed to cap-weighted S&P500 SPY / VOO / VFAIX / SWPPX. I have a better example than RAFI.

Equal weight S&P500 - RSP ETF - since in inception in 2003, it has beaten SPY literally until the middle of 2024... it outperformed or performed the same all other times.

Year to date: RSP -6.7% vs SPY -9.9%. RSP a tiny bit better since "Independence" Day.

Since I only buy ETFs, not individual stocks except a small handful of gold miners, my concern is not valuations of individual funds, since I have no choice over stocks in an ETF, rather I ask myself "should I be concentrated that much in individual stocks or sectors if I buy this ETF?"