The only thing an index fund (I'll assume SPY for sake of argument) gets you is diversity in number of holdings, but that benefit is greatly reduced when the individual components are heavily skewed in weight. The same applies to industry (and probably always did).
In an ideal world that diversity protects you from a one off calamity (ch 7/11) as each holding is expected to be relatively small and not likely to affect many other companies or the entire index to any great extent. That too goes out the window with the current concentrations.
"only thing"? "only"? That's huge:
> Famed economist and Nobel Prize winner Harry Markowitz called diversification “the only free lunch in finance.” The thought is that by diversifying, an investor gets the benefit of reduced risk while sacrificing little in expected returns over the long run.
* https://www.bizjournals.com/milwaukee/news/2018/10/03/invest...
* https://en.wikipedia.org/wiki/Harry_Markowitz
What's the alternative anyway? Throwing darts at listing of stocks? Asking Orlando the cat?
Diversity in number of holdings works well if the holdings are not heavily overweight/underweight and are not highly correlated. So RSP (equal weight S&P) would meet the definition of well diversified in respect to weighting. Unfortunately, equities have been trending towards an increasing degree of correlation which can't be adjusted for when an etf is constructed mechanically based on market cap.
I always urge friends, family etc. to look at the components of the various funds and etfs they hold as they will be shocked to find that, in aggregate, a significant portion of their position is in 10 or 15 stocks. For some that may be acceptable, especially if they hold other non highly correlated asset classes. For others, they need to take a little more time or consult a professional to research how to better balance that risk. As just one example, VXF attempts to capture the return of the non-S&P 500 equities.
I know about Worldcom Enron AIG Lehman... Gross fraud and negligence still isn't condoned. Buying the index is still better than trying to guess which of the 500 aren't performing fraud. Laugh all you want; best of luck to you
It’s a basket of restive safe equity, diversified across industry but not much in terms of nationality. Beyond that I don’t know what’s in it and don’t particularly need to care