Even in the worst case -- Vanguard doesn't lose anywhere near this premium -- we're talking 20-30 bps, or .25%. It's one of those scenarios where one has to choose what is less bad. Sure, an active manager could play with the index a bit more to help avoid this, but you'd be paying a lot more than .25% for his effort.
It might, however, be a good enough reason to side-step this issue and use Total Stock Market (VTSMX) instead of one based on an index that frequently drops/adds stocks.
It's insane to buy one of these old index funds that are now pop curiousities. The only reason DJIA and S&P are interesting is because decades ago we didn't have computers, so we used extremely simplified indicators. Now you can buy into an index fund with 1000s of securities that doesn't have arbitrary constraints determined by the needs of historical contiuity with obsolete newspapers.
VTSAX (the Admiral version of VTSMX) is the gold standard in the early retirement community, as far as I can tell. Some of the lowest costs an individual can get, with widest US equity exposure possible.
But don't those Total Stock Market indices have some kind of weighting for each stock? Wouldn't changes in the weightings just leave you with the same problem? Or maybe I'm missing something?
They do, but Vanguard (and probably other fund companies) take a number of steps to help prevent frontrunning. For one, Vanguard recently moved its benchmark provider to FTSE Group (CRSP) for many funds, which takes more of an averaged trade-price approach to determining weights. They also delay trades and "packet" securities between indexes and buffering small changes in market cap from predicting trades.
It's not impossible for someone to squeak some money out of the predictability of an index, but it's not something that makes a ton of material difference with a company like Vanguard.
It might, however, be a good enough reason to side-step this issue and use Total Stock Market (VTSMX) instead of one based on an index that frequently drops/adds stocks.