Alternatives to VOO to reduce Mag 7 exposure

[Spooky]

I’d like to give a plug to the S&P 600. Its valuation relative to the Russell is compelling given there is a profitability requirement to be in the 600. 
 

 

[Castanza]

S&P500 has always been driven by a handful of the top companies. Seems people get shook by this every time a new acronym comes out....

 

If you really want something different and don't have to worry about taxes from dividends then maybe something like SCHD. More fundamental driven and is less exposed to tech by weighting. VTI is probably better but best is just individual stocks. You either capture the market average with index funds or you blaze your own trail. 

 

[73 Reds]

37 minutes ago, Castanza said:

S&P500 has always been driven by a handful of the top companies. Seems people get shook by this every time a new acronym comes out....

 

If you really want something different and don't have to worry about taxes from dividends then maybe something like SCHD. More fundamental driven and is less exposed to tech by weighting. VTI is probably better but best is just individual stocks. You either capture the market average with index funds or you blaze your own trail. 

 

@Castanza Thanks for posting that.  There is a lot in that picture to ponder, whether it be individual companies, industries, trends, etc...  And not sure why I'd want to exclude any of the companies - even from as far back as 40 years ago (well, maybe Kodak which would have long since been replaced anyway) - from a broad based equity index worth buying today.

Edited January 2 by 73 Reds
missed line

[Milu]

I think eliminating exposure to the largest most profitable businesses the world has ever seen is most likely a losing bet over the next 5-10 years. If you are going to index just index, trying to be smart and remove certain names is no different to active management so just pick one or the other.

[Castanza]

2 minutes ago, 73 Reds said:

@Castanza Thanks for posting that.  There is a lot in that picture to ponder, whether it be individual companies, industries, trends, etc...  And not sure why I'd want to exclude any of the companies - even from as far back as 40 years ago (well, maybe Kodak) - from a broad based equity index worth buying today.

 

The question really might be: "Should you continue to invest long term in the US framework or broadly diversify to something like VT to capture global growth?" That all depends on how much runway you have in terms of investment years. I don't really get the focus on sector weighting as this always ebbs and flows. 

[Spekulatius]

14 hours ago, Castanza said:

S&P500 has always been driven by a handful of the top companies. Seems people get shook by this every time a new acronym comes out....

 

If you really want something different and don't have to worry about taxes from dividends then maybe something like SCHD. More fundamental driven and is less exposed to tech by weighting. VTI is probably better but best is just individual stocks. You either capture the market average with index funds or you blaze your own trail. 

 

 

13 hours ago, Milu said:

I think eliminating exposure to the largest most profitable businesses the world has ever seen is most likely a losing bet over the next 5-10 years. If you are going to index just index, trying to be smart and remove certain names is no different to active management so just pick one or the other.

Actually betting on the largest market cap companies in an index has been a suckers bet because history shows that the largest business don’t tend to stay the largest.

Edited January 3 by Spekulatius

[Milu]

1 hour ago, Spekulatius said:

 

Actually betting on the largest market cap companies in an index has been a suckers bet because history shows that the largest business don’t tend to stay the largest.

Probably true on average and depends a lot on how long a timeframe you are judging over. Over 10 years, large business tend to continue dominance, over 20 it's less clear, over 30 then it's evident. And the companies can continue to stay large, not like the just dwindle to nothing, it's often that the new batch of 'large' companies, tend to just be much larger. For example in 20 years time it may be that the current big stock of today continue to grow and are large in absolute terms, but some new batch of companies, hypothetically an AI 7 of Open AI, Anthropic, and 5 new companies, are the new leaders in terms of size.

 

Of today's batch maybe 3 or 4 dwindle, but perhaps Alphabet grows 10x over next 20 years, by actively removing that from your 'no mag 7 index' you have missed out on this. How about Broadcom, that is currently the 7th largest firm in the S&P right now, should that be removed, or Tesla which currently isn't in the top 7. Again you are now just actively managing your own personal index which I think is mostly a waste of time, and likely to not yield better results than just holding the index as it is.

[Castanza]

4 hours ago, Spekulatius said:

 

Actually betting on the largest market cap companies in an index has been a suckers bet because history shows that the largest business don’t tend to stay the largest.

Yet that very model is the benchmark that most hedge funds can’t outperform? 
 

Not sure I understand your point as the S&P500 has averaged what 10% historically? I’m not aware of any other index models that outperform over a similar timeline with less risk.  

[73 Reds]

4 hours ago, Spekulatius said:

 

Actually betting on the largest market cap companies in an index has been a suckers bet because history shows that the largest business don’t tend to stay the largest.

Yeah, but the issue is whether to remove them from a current equity index.  IMO that would be silly unless you believe they quickly go from the best performers to the worst.  

[TwoCitiesCapital]

6 hours ago, Spekulatius said:

 

Actually betting on the largest market cap companies in an index has been a suckers bet because history shows that the largest business don’t tend to stay the largest.

 

+1 

 

Equal weight has historically outperformed over long periods of time. Even recently, despite the concentration of the Mag-7/AI bubble due to their dominance, an equal weight ETF was outperforming on a 20-25 year horizon until the last 2-3 years. 

 

I expect the next drawdown will take us back to equal weight outperforming. 

 

20 hours ago, Castanza said:

S&P500 has always been driven by a handful of the top companies. Seems people get shook by this every time a new acronym comes out....

 

 

And it doesn't bother you that historically "driven" meant 15-20% instead of the current 40%? That seems like a big deal? 

 

[vinod1]

I agree with Castanza and Milu. 

 

Why is S&P 500 so hard to beat? I think the most important reason is that it tends to hold on to winners.

 

There is a nice real world experiment, although it is a sample size of 1.

 

There is a fund, Lexington Corporate Leaders Fund is now known as the Voya Corporate Leaders Trust Fund (LEXCX). It was established in 1935, it bought an equal number of shares in 30 major U.S. companies in 1935 and has never bought a new stock since. It only sells if a company goes bankrupt or suspends dividends, and it holds onto spin-offs and mergers.

 

Since inception in 1935, its performance was 10.5% annually, versus S&P 500 11.3% (S&P performance is approximated since it did not exist in 1935). Lexington Corporate Leaders Fund actually outperformed until 2015. Only with the recent 10 year tech outperformance did it lose out to S&P 500.

 

Imagine buying 30 leading companies pretty much willy nilly and matching the market performance and beating vast majority of fund managers over 9 decades?

 

Vinod

[Castanza]

8 hours ago, TwoCitiesCapital said:

 

+1 

 

Equal weight has historically outperformed over long periods of time. Even recently, despite the concentration of the Mag-7/AI bubble due to their dominance, an equal weight ETF was outperforming on a 20-25 year horizon until the last 2-3 years. 

 

I expect the next drawdown will take us back to equal weight outperforming. 

 

 

And it doesn't bother you that historically "driven" meant 15-20% instead of the current 40%? That seems like a big deal? 

 

Historically is the average…it’s been as high as 60% I think in the 70s. It’s irrelevant over time imo 

[TwoCitiesCapital]

5 minutes ago, Castanza said:

Historically is the average…it’s been as high as 60% I think in the 70s. It’s irrelevant over time imo 

 

And the 70s also proved a pretty awful time to be investing - especially after accounting for inflation. 

[Castanza]

29 minutes ago, TwoCitiesCapital said:

 

And the 70s also proved a pretty awful time to be investing - especially after accounting for inflation. 

Yet you still average 10% over time…I’m not trying to pick fights because I’m certainly not the most savvy investor on here. But it’s hard to take the argument of “equal weight index has outperformed over the last 25 years if you cut out 3 years from SPY; therefore it is superior.” The concentration is a feature not a bug. Regardless of how high or low it has been, over an average investors lifetime you end up averaging about 10%. 
 

As I said, if I were Hell bent on index investing; it seems to me the question around risk reduction through diversification is better addressed from a geographical angle than a concentration one. VT checks that box imo. This discussion also entirely excludes time in the market which is more important. 

 

Question: What’s riskier to your overall longterm portfolio performance? 30% in BTC or 100% in SPY? 

[TwoCitiesCapital]

43 minutes ago, Castanza said:

Yet you still average 10% over time…I’m not trying to pick fights because I’m certainly not the most savvy investor on here. But it’s hard to take the argument of “equal weight index has outperformed over the last 25 years if you cut out 3 years from SPY; therefore it is superior.”

 

I get that - and am not trying to make excuses for it. But the alternative of "market cap is better because it outperformed in 3 of the last 20" is equally ridiculous - particularly when measuring at it's all time highs/highs of concentration due to the current AI mania. 

 

I can't say for certain, but my guess is equal weight outperforms over the next 10-15 as a result of 1) today's concentration 2) the valuations of those names and 3) the lack of durable profitability displayed by many. 

 

Chips are notoriously cyclical. Tesla sales/profits are falling. Msft/Meta/Google appear to fairly valued if not high. I don't want the bulk of my exposure in these names. 

 

 

43 minutes ago, Castanza said:

The concentration is a feature not a bug. Regardless of how high or low it has been, over an average investors lifetime you end up averaging about 10%. 
 

As I said, if I were Hell bent on index investing; it seems to me the question around risk reduction through diversification is better addressed from a geographical angle than a concentration one. VT checks that box imo. This discussion also entirely excludes time in the market which is more important. 

 

I also believe in geographical diversification. So no qualms there...even when it's been return free risk for much of the last decade. 

 

My only point is there companies out there who have demonstrated thoughtful approaches to indexing that outperform equal weight. 

 

Over long periods of time, equal weight out performs in most periods of rolling returns. That is the simplest approach. 

 

DFA has index like products that weight companies on fundamentals that outperform Vanguards index products (like for like comparisons since Vanguard also has costs of execution and fees). They also have actively managed funds that further concentrate those funds that outperform the Vanguard products and their own indices. 

 

Research Affiliates also has smart index products that weight companies based on fundamentals of earnings/book value/dividends/etc. They've had a thoughtful way of adjusting how book value is measured in a knowledge-based world and supposedly back tests show this new measure of book value outperforms. Time will tell. 

 

PImco has products that outperform equity indices because they take an equity index and overlay fixed income alpha on top. PSLDX was the best performing equity fund in the Morningstar universe back to its inception leading into COVID. And even with the massive underperformance of the last 5-years, still leads the index by ~2.7% after fees per annum all the way back to its inception. 

 

There are a miriad of ways to beat the index. And plenty of people applying them in smart ways for long periods of time. You just gotta cut through the noise of the thousands that dont and have patience in the periods where they occasionally underperform. 

 

43 minutes ago, Castanza said:

 

Question: What’s riskier to your overall longterm portfolio performance? 30% in BTC or 100% in SPY? 

 

I think both are risky TBH. But only one is compensating me for the risk IMHO. 

 

Edited January 4 by TwoCitiesCapital