Alternatives to Market-Cap-Weighted Indexes

Comments on “When Diversification Takes a Back Seat in Index Funds,” by Brian Haughey, in the November 2024 AAII Journal:

This is a situation that every individual investor should be aware of. Since reading James Cloonan’s “Investing at Level3,” I’ve been splitting my large- and mid-capitalization index fund exposure between both market-cap-weighted and equal-weighted funds. Since 2018, the large-cap fund performed as described in the article, but the equal-weight mid-cap fund consistently outperforms the cap-weighted fund.
—Thomas R. from Oregon

The fact that cap-weighted exchange-traded funds (ETFs) are more volatile does NOT mean they are “riskier.” As James Cloonan correctly stated: “[W]hat we usually pay to avoid volatility is far greater than any loss the volatility can generate.” Cap-weighted index funds simply do what I do with my own portfolio of stocks—let the winners run!
—Robert A. from North Carolina

Over the last three, five and 10 years, among the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), the SPDR Portfolio S&P 500 High Dividend ETF (SPYD), the Invesco S&P 500 Low Volatility ETF (SPLV) and the Invesco S&P 500 Equal Weight ETF (RSP), only the Invesco S&P 500 Low Volatility has had significantly smaller standard deviation than the SPDR S&P 500 ETF Trust (SPY), but none of them beat the SPDR S&P 500 ETF Trust on the Sharpe ratio (crudely, return ÷ standard deviation). From 2004 to 2013, the Invesco S&P 500 Equal Weight outgained the SPDR S&P 500 ETF Trust—9.2% vs. 8.2% annualized—but with somewhat higher standard deviation. The future could be different, of course.
—Jim L. from Michigan

Concentration Complications

Comments on “Is Your Index Fund Too Concentrated?,” by Charles Rotblut, in the November 2024 AAII Journal:

The lack of diversification in an index might be a concern, but if the big boys have a bear market, I suspect the little guys will also. In the long run, it’s hard to beat the averages, and it seems like the big keep getting bigger (at least for now).
—Steven H. from Indiana

Many think improving diversification will improve your returns; however, that is rarely the case. What is being suggested here amounts to “I think the market is overvalued in its construction, so I’m going to leave what’s working and try something else at this point in the market cycle.” It is very easy to diversify your portfolio if that is your wish. Just buy some other ETFs to offset what you want more of. Then watch and see if your total portfolio performs better. I suggest maybe you will be surprised.
—Dave G. from Texas

Balancing Risk, Reward and Resilience

Comment on “It’s Hard to Be Great at Everything, Including Investing,” by Chris Pedersen, in the November 2024 AAII Journal:

After reading this and similar articles, I have learned one basic lesson: Stay invested at your own personal risk level (especially after age 60) and diversify using perhaps four to six funds at most (assuming a target-date fund is not used). It would be interesting to do backtesting with a blind draw of four or five styles at random, assign them equal weighting and then see how they project out. My guess is that there would be differences but that nearly all of the portfolios would perform well enough for the average investor over longer terms—i.e., 10+ years.
—Craig B. from Wisconsin

Exploring Schwab Funds

Comments on “Meeting Your Asset Allocation Needs With Schwab Funds and ETFs,” by Cynthia McLaughlin, in the November 2024 AAII Journal:

I have several Schwab brokerage accounts, I am a partial to Vanguard ETFs. I demand the lowest up-front costs, high liquidity and high daily trading volume to isolate lower transaction spreads/costs. I followed every article in this series [on alternatives for the AAII Asset Allocation Models], and they educated me more than the brokerage sites did. Except for Vanguard, the other brokerage offerings never measured up to my standards.
—Barry J. from Texas

I bought a portfolio of Schwab’s ETFs about 12 years ago, and altogether they’ve managed to outperform the S&P 500 index—mainly because I’m heavily concentrated in the Schwab U.S. Large-Cap Growth ETF (SCHG).

One thing I like about Schwab’s ETFs over Vanguard’s is that whoever directs the proxy voting of the underlying shares at Schwab isn’t as heavily into environmental, social and governance (ESG) and diversity, equity and inclusion (DEI). Nevertheless, I’m hanging onto a couple of Vanguard’s ETFs that have too much gain to offload without a big tax bill.
—Robert A. from North Carolina