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"Total
Stock Market" Index Funds
A New Fad or Investment Nirvana? Page
4
At the current prices for large U.S. growth stocks, we will soon find
out just how sensitive they are over the next four years.
The best known fund
that is part of the new trend toward "total stock market"
indexes is the Vanguard Total Stock Market fund, which is based
on the Wilshire 5000 index. My goal in the article was to point
out how heavily these funds are invested in the largest, most expensive
growth stocks trading in the U.S. This is due to the fact that the
indexes are market cap weighted. And the largest companies in the
U.S., for the most part, are trading at historically high multiples
of their earnings, dividends, and book values.
My beef with these funds
is not this overweighting to large growth stocks per se, but rather
the fact that many of the experts touting these funds fail to mention--let
alone quantify--this overweighting. Investors, as a result, believe
they are getting much greater small cap and value exposure than
they really are. The fact is, 100 companies, or about 3% of the
total, represent almost 60% of the total market value of the index.
There were long periods in stock market history when a more even
balance of large growth, large value, small growth, and small value
provided significantly better returns.
The following table shows
the breakdown for the total market based on size and book-to-market
deciles. We use the CRSP1 index data, rather than the Wilshire
5000 due to availability, and define size, growth, and value according
to the guidelines used by Eugene Fama and Ken French in their "Three
Factor" research.
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