How to future proof your equities portfolio

By Vanguard

Investing strategy

Using index funds to always be invested in the largest listed companies

Fifty years ago, when Vanguard was founded in the United States, the most valuable listed company in the world by market capitalisation was International Business Machines, now known as IBM.

Telecommunications group AT&T ranked as the second largest, followed by oil company Exxon, carmaker General Motors, photographic group Eastman Kodak, and U.S. retailer Sears.

Investors in the then newly created Vanguard 500 Index Fund – the first index-tracking managed investment fund – were able to gain an exposure to all of these top companies, and 494 others, that were included in the S&P 500 Index.

Fast forward to today, and all of the companies in the top ranks of the S&P 500 Index back in 1975 no longer appear in the top 10. Only Exxon, now ExxonMobil, ranks inside the top 20.

The one constant has been the S&P 500 Index itself. It has consistently tracked the top 500 U.S. companies, regardless of who they are.

It’s a similar story in Australia. In 1975, Australia’s largest listed companies were mostly all resources groups. These days, the composition of Australia’s top companies includes five banks and only one resources group.

Again, the only constant has been the indexes tracking Australia’s top companies.

Australia’s top 10, then and now

Rank	2025	1975
1	Commonwealth Bank	Broken Hill Proprietary Company Ltd (BHP)
2	BHP	Conzinc Rio Tinto
3	National Australia Bank	MIM (Mt Isa Mines)
4	CSL	Hamersley Holdings
5	Westpac	Bank of New South Wales
6	Wesfarmers	Colonial Sugar Refineries
7	ANZ Bank	Australian Guarantee Corp.
8	Macquarie Group	ANZ Bank
9	Atlassian	National Australia Bank
10	Goodman Group	Coles Group

^Sources:^{ASX and Companiesmarketcap.com. Companies ranked by market capitalisation}

About index funds

The companies listed on a share market at any point in time are likely to change over time for a whole range of reasons.

This can be because of mergers and acquisitions, companies being privatised, companies failing, or simply because of industrial evolution.

As noted above, the make-up of the biggest companies on the Australian share market has changed markedly since the 1970s.

That’s where index funds have come to the fore, because investors in an index-tracking fund will always have an exposure to the companies within the share market index that it tracks.

In Australia for example, the S&P/ASX 300 Index tracks the top 300 companies listed on the Australian Securities Exchange (ASX).

Australia’s largest exchange traded fund, the Vanguard Australian Shares Index ETF (trading as VAS) invests in all of the companies within S&P/ASX 300 Index.

So, through a single investment, it’s easy to invest in Australia’s 300 biggest companies. The constituents of the ASX top 300 may change over time as companies move in and out of the index based on their prevailing share market value.

But the S&P/ASX 300 Index itself will always follow its core objective to tracking the companies within the index.

That’s the essence of index funds and why they are essentially future-proof – in other words, while there may be changes to the constituents of an index over time, the index itself is perpetual.

So investing in index-tracking ETFs that provide instant exposure to hundreds, and sometimes thousands, of companies at once has become the norm for millions of investors worldwide.

Broad diversification

There’s another key benefit to investing in broad index funds, of course, and that’s all about the in-built sector diversification that they provide.

If you invest in a single company, you’re basically only buying into that company’s operations and the particular sector in which it operates.

Investing in a few companies can provide you with some diversification, unless all of those companies are operating in the same market sector.

The Australian share market is broken up into 11 key sectors, 24 different industry groups, 68 industries, and 157 sub-industries.

From an investing point of view, you’d need to invest in 11 separate companies to have an exposure to each of the key share market sectors.

To cover off all the large industry groups, you’d then need to invest in 24 separate companies on the ASX.

You’d need to pay stock brokerage fees on each company investment, which can be very costly.

But, even then, you’d still only have exposure to a handful of companies and some industries.

Alternatively, one investment in an index-tracking ETF investing across the broad Australian share market provides easy exposure to many companies operating in many different sectors.

And, if it fits in with your investment strategy, you could repeat the process for international share markets to build a highly diversified global equities portfolio.

^{Important information and general advice warning}

^{Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor and the issuer of the Vanguard® Australian ETFs. We have not taken your objectives, financial situation or needs into account when preparing the above article so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for any relevant Vanguard product, before making any investment decision. Before you make any financial decision regarding Vanguard investment products, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the relevant TMD before making any investment decisions. You can access our IDPS Guide, PDSs Prospectus and TMD at vanguard.com.au or by calling 1300 655 101. Vanguard ETFs will only be issued to Authorised Participants. That is, persons who have entered into an Authorised Participant Agreement with Vanguard (“Eligible Investors”). Retail investors can transact in Vanguard ETFs through Vanguard Personal Investor, a stockbroker or financial adviser on the secondary market. Retail investors can only use the Prospectus or PDS for informational purposes. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This article was prepared in good faith and we accept no liability for any errors or omissions.}

^{All investing is subject to risk, including the possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure profit or protection against a loss.}