I love investing with index funds – low cost, low thinking, diversified, safe.
What scares me a little is that the top ten holdings account for like 40% of the index. And it’s mostly technology.
I still invest in index funds but it’s not all sunshine and rainbows.
The challenge with this realization is that there is no alternative. Many actively managed funds hold the same assets!
Pot Kettle Black: Active Funds and the Index Concentration Argument [Morningstar] – “Indexing critics claim, among other things, that index funds are the tail wagging the dog. The way they tell it, investors pour money into index funds, the funds shovel those dollars into their top holdings, and the portfolio gets ever more concentrated. This, they say, makes index funds a kind of perpetual motion machine, distorting the value of its stock holdings.
Were this the case, though, you’d expect active managers to stand their ground, avoiding the stocks sitting atop index funds in favor of others. And yet when you lump all active large-cap funds together it looks an awful lot like … the index.”