Vanguard adds non-diversification warning to Total Stock Market

[Kevin K.]

Here's an interesting addendum they just added to the prospectus for VTI. As luck would have it, it arrived in my email inbox just as I was buying additional shares of Vanguard Small Cap Value (VBR):

In accordance with approval granted by the Fund’s Board of Trustees, the Fund
has revised its diversification policy under the Investment Company Act of 1940.
Under the revised policy, the Fund will continue to track its target index even if
the Fund becomes nondiversified as a result of an index rebalance or
market movement.

Shareholder approval will not be sought if the Fund crosses from
diversified to nondiversified status under such circumstances.

Prospectus and Summary Prospectus Text Changes
The following are added under the heading “Principal Investment Strategies”:
The Fund may become nondiversified, as defined under the Investment
Company Act of 1940, solely as a result of an index rebalance or market
movement.

The following is added under the heading “Principal Risks”:

• Nondiversification risk. Because the Fund seeks to closely track the
composition of the Fund’s target index, from time to time, more than 25% of
the Fund’s total assets may be invested in issuers representing more than 5%
of the Fund’s total assets due to an index rebalance or market movement,
which would result in the Fund being nondiversified under the Investment
Company Act of 1940. The Fund’s performance may be hurt
disproportionately by the poor performance of relatively few stocks, or even a
single stock, and the Fund’s shares may experience significant fluctuations
in value.

• Sector risk, which is the change that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme or volatile than fluctuations in the overall market. Because a
significant portion of the Fund’s assets are invested in the information
technology sector, the Fund’s performance is impacted by the general
condition of that sector. Companies in the information technology sector could
be affected by, among other things, overall economic conditions, short product
cycles, rapid obsolescence of products, competition, and government
regulation. Sector risk is expected to be high for the Fund.

https://personal1.vanguard.com/pub/Pdf/sp970.pdf

[dualstow]

I read through this text. How in God's name is a fund that holds everything supposed to cross into undiversified territory?

I see there's a BHeads thread on it. Words of wisdom from nisiprius, as always.

[Kevin K.]

I read through this text. How in God's name is a fund that holds everything supposed to cross into undiversified territory?

I see there's a BHeads thread on it. Words of wisdom from nisiprius, as always.

Yeah, I noticed that thread too and agree with you 100% about nisiprius. He's a legend for good reason.

On the other hand, the number of folks both in general and in that short (so far) thread who say they're fine with TSM being so concentrated because they own Total International too always amazes me - not least because the global market weight crew often casts aspersions on small-cap value and such. Paraphrasing Tyler, "there's more to stock diversification than domicile." You'd think none of these folks know how to do a backtest:

https://www.portfoliovisualizer.com/bac ... VoCbBwuzYL

[dualstow]

I labeled the 3 portfolios in the chart
https://www.portfoliovisualizer.com/bac ... Sxemi1xaoj

[Jack Jones]

My take is that I can take part in the AI craze by just buying TSM.

[dualstow]

My take is that I can take part in the AI craze by just buying TSM.

+1
I have some VGT too. Vanguard’s infotech etf (Mutual fund version is VITAX)

[Kevin K.]

On the other hand, have a look at the "equity market capitalization" graphic in this backtest:

https://www.portfoliovisualizer.com/bac ... epnJ3Ghc8O

This is of course the TSM/SCV barbell Tyler uses in the Golden Butterfly, and it's almost perfectly balanced between large, mid and small caps. This is in part due to the fact that VBR includes more mid-caps than much more value-y SCV funds (e.g. DFA's, or AVUV). He puts a lot of thought into his recommendations - something I've come to appreciate more and more over time.

[dualstow]

I must be reading it wrong. It looks like the blend of Total aka VTI and Smallcap (“Sample Portfolo” in blue) is very similar to but not as good as just S&P 500 (Green).

[Kevin K.]

I must be reading it wrong. It looks like the blend of Total aka VTI and Smallcap (“Sample Portfolo” in blue) is very similar to but not as good as just S&P 500 (Green).

No, you're not wrong over that short time frame. My point was to show the diversification of exposure across market caps and industries of the half TSM, half SCV allocation.

But over longer periods the performance speaks for itself:

https://www.portfoliovisualizer.com/bac ... XEFSeIdvzj

Point being, diversifying across industries rather than relying on ~7 tech firms for your equity market returns seems very Harry Browne-ish to me. YMMV.

[dualstow]

Ah, gotcha.

[boglerdude]

Any big bag of stocks is good enough, but cap weight is equal weight. eg you own 1% of Microsoft and 1% of Joe's vegan hot dog stand. You're claiming to be smarter than the market if you want $100k worth, or 50% of Joe's stand.

[ochotona]

I wonder how an equal weight Dow Jones Industrial Average would do... it's only 30 stocks, anyone could do it.

[mathjak107]

i have been warning about index funds for months .

the s&p has seen tech quadruple since 1994 . that makes it more risky than nasdaq was back then .

not only that but a mere seven stocks have been responsible for propelling both the s&p and the total market funds.

i had one tech heavy fund fidelity blue chip growth almost double in two years..

for 2025 i cut everything back and went more value oriented

[Smith1776]

Mathjak, you should start a podcast. Not even joking.

[mathjak107]

i have enough to do. ha ha …

i keep trying to have less of an interest in this stuff but somehow keep getting sucked back in to learn more .

i spent a lifetime learning and it’s hard to stop even though i can at this stage

[Tyler]

i spent a lifetime learning and it’s hard to stop even though i can at this stage

Perfect background for a podcaster.

[mathjak107]

my wife would kill me. ha ha ha

[dualstow]

If you do, there had better be some drum fills included

[mathjak107]

can’t beat that. ha ha ha

[Jack Jones]

for 2025 i cut everything back and went more value oriented

Me too!

[mathjak107]

i think if one has a portfolio of not 100% stocks , then it’s prudent to cut back from the 7 stocks that account for 32% of the entire s&p .


that which has the biggest run up tends to get hit the hardest when expectations are lowered .

so while i do have a healthy position left in fidelity blue chip growth and vti , at least half that money has been cut back and put in fidelity equity income , fidelity growth discovery , berkshire and my forced value play the dogs of the dow .

that is my core conventional investing


then i did about a third of the stock budget in the carolina reaper leveraged risk parity portfolio.

bonds i kept at a minimum with the biggest positions in fidelity floating rate high yield and fidelity high yield .

i have some nyf the ny triple tax free muni fund as well but anything interest rate sensitive i am keeping clear of for the most part .

i rather use alternative funds from aqr like qdsnx and qlenx

[Jack Jones]

berkshire

Me too!

[mathjak107]

we can be twins