What are your thoughs around cap-weighted index funds

[Fork]

I just stumbled over this article about whether cap-weighed index funds may not be the ideal solutions.

The fundamental flaw in cap-weighted index funds

From other sides I heard that indeed the market capitalisation of some companies could actually be in some sort of bubble as index funds just blindly pump them further.

My question to all you experts:

• What do you think of this article. Is this just fear mongering or do you agree?
• Are there some useful non-cap-weighted index funds you are aware of? And if yes, should they be a part of a mustachian portfolio?

I’m really curious as of what you think about that…

[Patirou]

There were already some threads like that…

Reality for me would be :

1. I cannot predict if it is right or not, I cannot predict the future
2. I am not able to determine when a most certain correction will occur (it will occur, I do not know when)
3. Through index funds, I am owning companies, these companies are generating revenue. So I will be better off investing than just doing nothing. I might overpay them right now, during a correction (or for instance during the pandemic, I got them cheap.

BTW dividends where rather stable the last y compared to the previous one…

The index funds strategy (for private) has one goal : generate a quasi certain revenue over the long term at a minimum of cost, be it TER and time. I am expecting 5 +x% after inflation and tax, that is fine for me and ensure that I won’t die poor. The rest is irrelavant.

My 2 cents.

If you speak German, I can recommend you the “egal” series from the Finanzwesir. If your investment goal differs, the relevancy of it differs.
Das Ziel: Nicht arm sterben! - YouTube

EDIT: Link edited for more relevancy

[wapiti]

S&P500 is a bad index fund because only large caps are selected. It could even be considered as an active fund due to a committee choosing which stock is in the S&P500. To avoid the issue a total stock index is better.

[Fork]

@Patirou

Reality for me would be :

1. I cannot predict if it is right or not, I cannot predict the future
2. I am not able to determine when a most certain correction will occur (it will occur, I do not know when)
3. Through index funds, I am owning companies, these companies are generating revenue. So I will be better off investing than just doing nothing. I might overpay them right now, during a correction (or for instance during the pandemic, I got them cheap.

I completely agree. My point is not about doing (2) market timing or (3) not owning companies.

My only point is to discuss the arguments in the article. Namely that creating an index fund using the “market-cap” criteria may not be optimal and whether there are alternatives approaches that allow passive and low-cost investing but with another weighting.

[Patirou]

There are other approaches. GDP approach etc.

Question is :
Nestle is participating in the GDP nearly all countries in the world. Where would you put it ?
And now you have to redo it with every international company.

In the end : nothing beats the market cap one or two ETF in terms of cost ratio/return.

And btw, there is a large chunk of the world economy which is not included in the ETFs. Just take all the companies which are actually not listed on the stock market, and actually there are some big ones (Dell for instance, which unlisted some time ago) or some other where there is no free floating capital

[Patirou]

Does not matter really…
The difference over the VTI and the VOO is abou 0.0x% over 10y

Some go even as far to represent whole northamerica by VOO. Mexico is a developing country and Canada is 5%. Does not matter much.