[twic]

Depends on the index. The usual ones are indeed market cap weighted, and so adopt the overvaluation of bubble stocks, but there are indexes which are weighted otherwise, in an attempt to avoid that. One example is the RAFI fundamental family of indexes:

https://www.rafi.com/index-strategies/rafi-fundamental-indic...

They are pretty cagey about the exact formula, but they do say that

> Security weights are determined by using fundamental measures of company size (adjusted sales, cash flow, dividends + buybacks, and book value) rather than price (market cap).

The top ten holdings in their US index are (rank - company - weight):

  1 Apple 4.1
  2 Microsoft 3.4
  3 Alphabet 3.3
  4 Berkshire Hathaway 2.3
  5 Amazon 2.2
  6 Meta Platforms 2.2
  7 JPMorgan Chase 2.1
  8 Exxon Mobil 2.0
  9 Bank Of America 1.4
  10 Chevron 1.3

Whereas those of their benchmark, the Solactive GBS United States Large & Mid Cap Index, whatever that is, are:

  1 Nvidia 7.1
  2 Microsoft 7.0
  3 Apple 5.7
  4 Amazon 4.0
  5 Alphabet 3.7
  6 Meta Platforms 3.1
  7 Broadcom 2.4
  8 Tesla 1.7
  9 JPMorgan Chase 1.5
  10 Eli Lilly 1.3

[imakwana]

Glad to see a fellow fundamental indexer on HN! As a US based investor, I personally invest in the RAFI US broad market fundamental index (FNDB ETF) which does keep up with the Vanguard US total market over the past 10 years except the bubbly years of 2020/2021 & 2024/2025, even with a higher expense ratio.

Last 10 years comparison (VTI vs FNDB): https://www.portfoliovisualizer.com/backtest-portfolio?s=y&s...

In my case, after observing the Covid-19 craziness in market, I decided to dig further on value strategies and discovered this gem from Research Affiliates in Journal of Portfolio Management circa 2012, which completely convinced me on the concept of fundamental indexation as a superior alternative to market-cap weighted total market index.

Rebalancing and the value effect (JPM 2012): https://www.researchaffiliates.com/content/dam/ra/publicatio...

[anonymars]

2012 was a long time ago. I'm more inclined to Value myself, but has it held up?

I threw together a quick comparison with that tool (handy, thanks) of Vanguard Growth vs Vanguard Value and it's not too pretty. Sure, Value is less volatile, but...

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&s...

I mean I guess we'll see what happens when the music stops again, but it resembles the same issue as being "right" about a market drop -- that you can be right, but the timing is such that it nevertheless would have been more lucrative to be invested the whole time anyway

[bryanlarsen]

My comment was originally much larger, but I trimmed it because it was muddying my original point.

Yes, you can choose an index fund that's not cap-weighted S&P 500. However, any index fund that didn't have a substantial portion of its investments in NVDA and friends did very poorly over the last few years.

So either way, you're screwed.

- If your index has a lot of NVDA et al, you're exposed to lots of risk.

- If it doesn't, your investment values are currently a lot lower than they otherwise have been.

So ideally you would be in cap-weighted S&P now and for the last few years, and switch just before the seemingly inevitable crash.

But that's no longer "put it in an index fund and forget about it".

[twic]

You're certainly right that indexes like these don't benefit from the bubble!

But it's not the case that they "did very poorly". Forgive the UK sources, but compare HMWO (an MSCI World ETF) [1] and PSRW (a RAFI All World 3000 ETF) [2]. These are world indexes, but that's 70% US or something. For the last five years:

  Date         HMWO   PSRW
  07/24-07/25  15.77  13.49
  07/23-07/24  18.46  14.35
  07/22-07/23  13.86  13.87
  07/21-07/22  -9.06  -4.93
  07/20-07/21  35.31  38.57

It's a small difference. For a set-and-forget investment that insulates you from an AI bubble collapse, it's absolutely fine.

Funnily enough, if you go further back, the RAFI index is actually further behind. No idea what that's about.

[1] https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Do...

[2] https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Do...

[bryanlarsen]

HMWO is 5.5% NVDA. It's not significantly different from the S&P 500. Any world cap-weighted index is going to have the same issue.

[twic]

Exactly, yes. HMWO is the "normal" cap-weighted fund here, PSRW is the RAFI fund.