S&P 500 Index Funds

The Good and the Bad

The good of buying an S&P 500 index fund especially from Vanguard Group of Funds is a basket of stocks with extremely low turnover (very tax efficient) all accomplished by a fund with an expense ratio low in the extreme.  Wow what more could one ask for?

The biggest problem index funds they are capitalization weighted with the lion share of companies with larger market capitalization exert a greater impact on the index value.  If the index was to be constantly equal weighted there would be an increase in portfolio turnover thus reducing (sometime significantly) its tax efficiently for those in a taxable (non pension) accounts.

What we have experienced is the top 10 stocks powering 40% of the gains and during any decline most likely these 10 companies will power the majority of the decline.  Our current market environment we may be witnessing the bad aspect of an S&P 500 index fund.