Do US Large Cap Equity Index Funds Put Your Clients at Risk?

"Those who cannot remember the past are condemned to repeat it," wrote philosopher George Santayana in 1905. Investors in large-cap core index funds would be wise to heed his warning.

In 2020 and 2021 our organization produced over 100 pieces of empirically robust, historically informed and evidence-based research that appeared both on our website and peer reviewed journals. That work shed light on the most dire risks to investors in the most speculative markets we have seen in 55 years of collective money management. For a short while, going against the crowd was uncomfortable. For those who heeded our evidence-based philosophy and research, the majority of the steepest losses were avoided.

Over time we believe our safety-first approach to investing will help people compound wealth with less downside risk. While avoiding the devastating losses in the morass of overvalued loss-making firms has accrued to our readers’ benefit, this piece highlights what history and the data suggests will be the “next shoe to drop.” We believe there is an easily identified and easily avoided bubble in certain stocks due to the now-prevalent preference for the exclusive use of index funds.

Large Cap Stock Index Funds: Investment Objectives vs. Investment Results

The proliferation of low cost mutual funds and equity ETFs that replicate the large-cap indexes like the Dow Jones Index, S&P 500 Index and Russell 1000 Index have been a boon to investors. With management fees near zero and investment strategies based on the market cap of their constituents these funds are cheap and easy to explain. They have become a staple of investors’ portfolios for good reason.