Here’s a humbling exercise. Pull up the fund that made you feel smart this year and ask: did it go up because of the thing on the label, or because of something that wandered into the basket? Spencer Jakab, in Tuesday’s Heard on the Street, has three answers from the past five years, and none of them flatters the buyer.
Early 2021 is the first. Value had been the market’s laggard for years, small-cap value most of all, and the investors who finally bought a Russell 2000 Value fund were rewarded with a quarter that trounced the S&P 500. Not because value turned — that came about a year later — but because the meme frenzy had briefly made GameStop (GME) and AMC Entertainment (AMC), two companies losing money, the biggest holdings in an index built for cheap, unglamorous stocks. You bought discipline and got a message board.
Round two came three years later, and this time the whole Russell 2000 benefited. Strategy (MSTR), the bitcoin-hoarding former MicroStrategy, and Super Micro Computer (SMCI) had ballooned far beyond anything resembling a small cap, but Russell rebalanced its indexes only once a year, in late June, so both stayed put. Between them they supplied one-third of the Russell 2000’s first-quarter gain in 2024 — and were dropped from the index about the time the run ended. And this spring, anyone buying emerging markets to get away from AI got a double helping of it: Taiwan, home to 23 million people, outweighs Turkey, Mexico, Brazil, India and South Africa put together in MSCI’s index, South Korea is a close second, and in May three chip makers — TSMC (TSM), Samsung and SK Hynix — contributed more to the index’s gain than its roughly 1,100 other stocks.
Two ‘emerging markets’ funds, a dozen points apart
You can see the label problem in Wednesday’s ETF table. The iShares MSCI Emerging Markets fund (EEM) is up 24.8% this year; Vanguard’s FTSE Emerging Markets fund (VWO) is up 12.8%. Same words on the tin, a dozen points of daylight, largely because the two index providers disagree about whether South Korea is still emerging. Jakab’s verdict, which we’ll borrow: buy cheap index funds to diversify, “but keep your day job.”
Our read
Investments/Risk (IN04). The lesson isn’t that indexing is broken; it’s that an index is a recipe someone else writes and occasionally rewrites, and your job is to know what’s in the pot. The house owns these recipes with its eyes open — VWO in 9 model books, Korea’s EWY in 17, Taiwan Semiconductor itself in 30 — held at weight, nothing added, and we keep the equal-weight S&P 500 (RSP, 2 books) around as the honest scoreboard: it’s up 10.8% this year against 14.2% for the cap-weighted SPY, which tells you how much of 2026 is a handful of names.
So open the fund’s holdings page, not just its factsheet. Count how many of your ‘different’ funds own the same ten stocks; find out whether your EM fund is really a bet on Asian chips (it probably is); and when a fund jumps for reasons you can’t name, treat the gain as luck until proven otherwise — luck is for banking, not for extrapolating. Fifteen minutes with the overlap is the cheapest diligence in investing, and it’s the kind you do before the weather turns, not after.