While there is a lot of merit to simply investing in a broadly diversified portfolio of low cost index funds, market cap weighted index funds have some features (or flaws, depending how you see it) that drive me to alternatives. One key example is this recent WSJ story highlighting how US index funds are about to add shares in loss-making former unicorns Uber and Lyft. This is largely due to how the Russell 1000, 2000 and 3000 US stock indices are designed to simply include and weight the 1000 or so largest US listed companies by market cap (size), regardless of whether those companies are profitable or not, regardless of whether they are paying dividends or diluting shareholders. The latter is the opposite of buybacks, which in this earlier post I show is a strong mark of good stocks to invest in.
Looking at the largest ETFs by assets, most are market cap weighted, so many will include these loss making “unicorn alumni”, and so be exposed to that part of the market should it fall in a 1999-2001 style correction over the next few years. I believe 2019 rhymes far more with 1999 than with 2008-2009, so am expecting this is a time to invest in value over growth, rather than simply buying the whole index.