WEEKLY BRIEF | Vanguard Will Buy the Next Trillion-Dollar Stock

Hello, and welcome to the IVA Weekly Brief for Wednesday, May 13.

There are no changes recommended for any of our Portfolios.

Mega IPOs Are Coming—Here's What Vanguard Will (and Won't) Do

OpenAI (ChatGPT), Anthropic (Claude) and SpaceX are all reportedly eyeing initial public offerings (IPOs) this year. SpaceX looks like the first out of the gate.

One question already dominating the financial media: How quickly will these companies land in the indexes like the S&P 500?

Index providers such as S&P Dow Jones and Nasdaq are rewriting their rules to usher trillion-dollar newcomers into indexes faster. After all, excluding companies worth more than the GDP of some countries would be an uncomfortable position.

Surprisingly, Vanguard may end up ahead of the pack. CRSP (now Morningstar)—the index provider behind many Vanguard index funds—adds newly public stocks after just five trading days.

When these IPOs arrive, expect headlines claiming Vanguard is “going all in” on AI. Don’t buy it.

Vanguard isn’t making an active bet on SpaceX or OpenAI any more than it was making a bet on bitcoin when it bought shares of Strategy a year ago. It’s simply following the indexes—buying the haystack, as it always does.

Will these IPOs mark the top of the AI bubble? Possibly. But we'll only know with hindsight.

That’s why I wouldn’t treat them as a signal to rush into the market—or to run from it. These companies will likely become major holdings in broad-market indexes and index funds, so yes, they matter. But “they matter” doesn’t mean you abandon diversification or build your portfolio around one theme.

My approach remains the same: Own a portfolio that can benefit if AI stocks continue soaring, but one that doesn’t depend on that outcome to succeed.

More Name Changes

I told you last week that Capital Growth Annuity was being renamed PRIMECAP Annuity—and, right on schedule, that change took effect yesterday. But it wasn’t the only nameplate Vanguard swapped out on Tuesday.

To be clear, these are label changes only. The tickers, fees, managers, benchmarks and investment strategies all remain the same.

Energy (VGENX) is now Energy Opportunities—a rename that’s about five years overdue.

In October 2020, Vanguard overhauled the fund—firing its internal quantitative stock pickers and broadening the definition of “energy” to include utility stocks. Since then, the actively managed Energy fund has behaved less like a pure energy play and more like a 50/50 blend of Energy Index (VENAX) and Utilities Index (VUIAX).

If you own Energy Opportunities, nothing changes. The new name distinguishes it from Energy Index—but barely. “Energy Plus Utilities” (or maybe “Power & Energy”) would’ve saved investors a little detective work.

Vanguard also renamed its LifeStrategy funds. Out go the old descriptive labels—Growth, Moderate Growth, Conservative Growth and Income. In their place comes a more literal naming convention based on stock and bond allocations.

Honestly, I think the new names are an improvement. I’m not sure there’s ever been a universally accepted definition separating a “moderate” growth investor from a “conservative” growth investor. And calling someone with less than half their portfolio in stocks a “growth” investor always struck me as a bit odd.

Still, this is cosmetic. Nothing changes for investors’ portfolios or bottom lines. The names are different. The funds are not.

The Bond Manager Shuffle Continues

Vanguard’s door is opening a little wider.

The fund giant recently hired Alexander Payne from Morgan Stanley to lead its mortgage team, and wasted no time putting him to work. On Monday, Payne was named co-manager of Government Securities Active ETF (VGVT) and Short-Term Federal (VSGBX).

At the same time, John Madziyire stepped away from all his portfolio management duties, including the short-, intermediate- and long-term Treasury funds, Government Securities Active ETF and Inflation-Protected Securities (VIPSX). Madziyire isn’t leaving Vanguard, though—he’s “returning home to London,” where he’ll join the Global Bond index team.

As I said in April when Vanguard added co-managers to several bond funds, the firm is increasingly willing to look outside its walls for investment talent.

Historically, Vanguard prided itself on developing managers internally. I don’t think that philosophy has disappeared. But the culture is clearly evolving. The message from Malvern seems to be that experience gained elsewhere is no longer viewed as a drawback—and may even be an advantage.

Our Portfolios

Our Portfolios are showing solid returns for the year through Tuesday. The Aggressive Portfolio is up 9.9%, the Aggressive ETF Portfolio is up 8.5%, the Growth Portfolio is up 8.6%, the Moderate Portfolio is up 9.4% and the Conservative Portfolio is up 5.3%.

This compares to an 8.5% return for Total Stock Market Index (VTSAX) and 11.9% gain for Total International Stock Index (VTIAX). Total Bond Market Index (VBTLX) is flat on the year. Vanguard’s most aggressive multi-index fund, Target Retirement 2070 (VSNVX), is up 9.0% for the year, and its most conservative, LifeStrategy 20/80 (VASIX), is up 2.1%.

IVA Research

Yesterday, I dug into one of investing’s most accepted beliefs—that small stocks outperform over time—and whether the real-world evidence actually supports it.

Until my next IVA Weekly Brief, have a safe, sound and prosperous investment future.