[Colin]

I see alot of comments such as ‘VOO and chill’, indicating that you should just buy that etf and hold forever. Maybe a silly question, but if you buy and index etf such as VOO, you’re really buying fractions of the underlying stocks (NVDA, MSFT, etc) that the etf is made up of… so what happens when the etf managers decide that one of the magnificent 7 are no longer magnificent enough to be part of the etf holdings?

They swap it out for something else, and you no longer own a piece of the outgoing company, correct?

So then if you were really adamant about going long on a particular stock, you should likely buy the specific stock, not an index fund?

And at what point would a stock be dropped from the etf holdings?

[Elie]

Actually, the self cleaning aspect of ETFs is one of the things that makes them great.

[Tolga]

Voo follows S&p 500 index.
For a stock to be included in the S&P 500, it must meet certain criteria set by the S&P Dow Jones Indices committee. These criteria include:

Market Capitalization – The company must have a market cap of at least $18 billion (as of recent updates, but this number can change).

Liquidity – The stock must have sufficient trading volume, with at least 250,000 shares traded monthly over the past six months.

Domicile – The company must be U.S.-based and have its primary listing on a U.S. exchange (e.g., NYSE or Nasdaq).

Public Float – At least 10% of the company’s shares must be available for public trading.

Financial Viability – The company must have positive earnings in its most recent quarter and over the past four quarters combined.

Sector Representation – The S&P committee considers a company’s sector to maintain a balanced representation of industries in the index.

Listing Requirements – The stock must be listed on the NYSE, Nasdaq, or Cboe BZX.

History of Operations – The company must have a history of publicly traded stock for a significant period.

The S&P Index Committee ultimately makes the final decision, considering qualitative factors beyond these technical requirements.

Stocks are usually added when another company is removed due to a merger, bankruptcy, or other factors.

[Ethan]

ETF managers aren’t really given the freedom to make that choice. They have to follow the index.

In fact, if the index changes, they are forced to either buy or sell your stock.

[Luke]

SP500 index (VOO) is a “weighted average” based on the biggest 500 companies in the stock market.

This means the bigger the company is, the bigger percentage it will have in the index.

SP500 is roughly 30% magnificent 7

[Tristan]

Technically, yes. But a passive ETF like VOO will only replace if it is removed from the s&p500

[Kenneth]

Start young and dollar cost average. Just need steady money flow and time.

It will work.

[Trevis]

…what Ethan said. But this is a feature. Not a defect. The reason that the index is what is suggested is to stop you from deciding which stocks.

The stocks are based based on their relative value without human intervention.

[Rawee]

Keep in mind, GE and Intel used to be the big dogs of the S&P 500 in the 2000’s, would you have known when to sell when the thesis runs out?

Investing in the S&P 500 long-term, means you believe in the index, and the whole portfolio – be it market cap or equal weight.

Market cap exposure like VOO, leaves you exposed to 30% in 7 companies, but it re-balances quarterly.

(Door Dash just got added last Friday.) You saw this when NVDA took a greater share of of any market cap weighted S&P 500 ETF in 2023.

You can buy the equal weight RSP ETF, which would act like a total market S&P 500.

You should be buying index, and direct-invest only if you understand the business – I don’t view them as the same investment dollars.

I have another portfolio I invest directly into S&P 500 companies, particularly Costco, Microsoft, Amazon, Expedia, Starbucks, etc.

because I live in the PWN and that benefits my local economy and I get company news without trying, watching local news.

But I’ll ditch them in a second if the thesis runs out, just like it did for Intel and GE.

So, plan to follow each company, like you’re an investment analyst because you are: You’re the analyst to your own portfolio.

[Luke]

You’re using your brain I see! Beware, that’s discouraged in investing these days — but not for entirely unmerited reasons.

I’ll chime in with my perspective as a value investor who holds only individual stocks, which is probably somewhat unique.

A lot of people think that market cap weighted index funds — or any index fund for that matter — are “passive.” However, this is a huge misconception.

Index funds are very active, changing their holdings, weightings, and impacting the market in a number of ways:

1) Committees overseeing an index generally follow both rules and a certain amount of discretion to decide what new stocks should be included in, or removed from, the index.

2) Index funds are market cap weighted, and buy more of the most expensive stocks while selling more of the cheapest, and tilting exposure very, very, very heavily towards large and mega cap stocks.

This is a kind of “anti-value” bet and is a bit of a self reinforcing, bubble like dynamic whereby the largest (cap) stocks get larger because more money flows to them, which inflates their capitalization further, which further cements their position as the largest capitalization stocks in the index.

As passive has appeared to outperform active, less and less capital is available to counteract these sorts of self-reinforcing feedback loops, and the indexes have become more and more concentrated in a few megacaps over the years as passive has replaced active.

3) Indexes are very procyclical, selling or buying simply because money comes in or out of the fund.

This is the case of any fund of course, but portfolio managers who buy and hold individual stocks — including very obscure individual stocks which don’t belong to any index — will quickly observe just how correlated individual stocks belonging to an index are with that index, versus how uncorrelated obscure stocks belonging to no index are.

This can be a huge advantage for prudent investors who focus on obscure value stocks or aspire to superior risk adjusted returns.

Passive investors forget that at the end of the day, they just own individual stocks, and in fact these days, they own a very concentrated bet on a small number of very expensive mega cap growth stocks — a segment of the market that, Historically, usually has quite poor returns.

In many ways, the make up of the market today and prominent psychology and complacency towards it mirrors the Nifty Fifty, or to a lesser degree, the tech bubble, and so do the valuations.

Just because risk is obscured from you, or everyone agrees with you, doesn’t mean it isn’t present.

I’m very happy to be choosing my stocks individually, and in quiet and unloved corners of the market where I know that I am paying substantially less than the sum of the earnings and free cashflows over the next ten years, or even than the assets on the balance sheet alone.

The place to be is usually where the happy consensus isn’t, and barring the most heroic of feats, forward returns on the S&P500 look pretty dysmal over the next 10 years at current valuations.

You’re just paying far too high a price up front compared to what the future cashflows are likely to be, and everyone is looking in the rear view mirror and expecting great returns for the next 15 years just like the last 15, without considering that the starting point (valuations) and tailwinds such as low inflation and globalization may not be present.

The market has priced in the rosiest possible expectations and set itself up for surprise to the downside, more than to the upside.

No matter what valuation metrics or assumptions you use, short of very heroic assumptions, the forward return on US equities do not appear to be much in excess of treasuries at the moment — and yet come with substantially more risk.

This doesn’t bode well and I can’t consider investing in the S&P500 at such valuations and without any risk premium to be very prudent.

If I were a passive index investor, I would not feel safe in the S&P500 alone. I would diversify into ex-US markets (who cares if the S&P500 has global exposure.

The valuations are double that of most ex-US stocks, simply because they’re listed in the US, meaning those US listed companies have to produce returns on equity double that of their foreign listed counterparts to even begin to justify their valuations), and also away from tech (literally everyone’s portfolios are the S&P500 which is already tech heavy, plus QQQ or somesuch to further concentrate into tech — not smart) and into small caps, value, and equal weight index funds (if you’re going to own the S&P500, the equal weight might be a good way to have some value tilt, even if everything that you own is still US large and megacap).

And if you were to just buy even an equivelant weighting of every share in the S&P, market cap weighted, and never sell, I still believe you would outperform the S&P which rebalances and changes holdings because the S&P actually does so in a value destructive manner.

I believe there’s even a research paper to this effect.
So, your intuition is good. The challenge comes in with regards to the discipline and ability required to implement it.

Most people don’t have the psychological makeup necessary to avoid shooting themselves in the foot when holding individual stocks, and even engage in value destructive behavior using passive indexing approaches (procyclical behavior, concentration in hot sectors like tech, contributing more at the tops of markets and less at bottoms, and changing their allocations rather than sticking to a plan and holding diversifying assets through thick and thin, the best returns often coming after an asset or asset class has underperformed for a long period of time and investors sell out of it)

[Sihing]

The magnificent 7, in my opinion, might just be the riskiest thing about buying an index containing those stocks.

Because yes, they’ve performed great and are responsible for a big portion of growth the last few years.

Also means the whole index would be heavily affected if those 7 show big drops because they account for a large portion of the whole fund.

[Sihing]

Generally people don’t buy ETFs or index funds when they’re really adamant about owning stocks in certain companies, because if you want to do that you just directly buy those individual stocks.

[Mark]

Research how index funds and etfs work and ull answer ur own question

[Gonzalo]

If you were “really adamant about going long” on a particular stock, you can go ahead and buy that stock. But you should understand the risk.

Everyone has a different risk tolerance. Some people don’t buy individual stocks at all.

Some people follow the guideline of never having more than 10% of their portfolio in individual stock. Do what lets you sleep at night.

Personally, I don’t have to lose sleep over Nvidia’s recent performance.

[Author]

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