ETFs are a great way to invest in stocks. Over the years, I've been buying the S&P 500 ETFs for my kids' portfolios.

But today, ETFs are likely to provide disappointing returns over the next decade.

Why I'm not buying ETFs today

Over the last 15 years, we sat in a global era of cheap money printing. The Fed was pumping money and interest rates fell to zero. There was a flood of cheap money, which lifted valuations of the biggest tech giants, including Alphabet, Amazon, Meta Platforms.

It made sense to load up an S&P 500 ETF. Back then, ETFs were cheap. And a huge chunk of ETF returns came from a handful of these tech blue-chips. You made good money as the ETF's PE ratio kept growing.

Today, things are different.

Valuations are no longer cheap. Especially with higher interest rates, you can buy Singapore REITs, bonds and even cash between 3-6% yield. In fact, the current S&P 500 index PE ratio is ~30x.

John Bogle, the founder of the Vanguard Group, said ETF works because when you buy the entire market...

1. You get the broadest diversification across different stocks and sectors
2. At a very cheap cost

That first reason for buying ETFs is gone.

You'll already know the top 10 positions of US stocks account for at least 35% of the S&P 500 market cap. Buying into the index today is really buying into a concentrated handful of pricey tech stocks.

High valuations of these heavy large caps will mean lower returns at least over the next decade.

What's more, Vanguard also says passive investing will have a huge underperformance: “But if the Vanguard numbers look bad, consider this: Their model implies absolute catastrophe for those who invest in large U.S. growth stocks – the kind currently dominating the market. The firm sees a passive investment in U.S. growth losing somewhere between 20% and 40% of its value in real or constant dollars over the next 10 years. (That’s based on forecast nominal average returns of minus 0.4% a year to minus 1.6% a year, and their inflation estimates.)”

Vanguard builds its whole business on ETFs. It's the second largest ETF provider in the world.

When it says there's trouble with passive investing, I'd sit up and listen.

I'm not saying these tech giants will go bust

These companies have gushed enormous free cash flow - more than other businesses that have ever existed. However, my big problem is overpaying for businesses.

During the 1970s, the Nifty Fifties dominated index returns. People started picking up market darlings like blue-chips "for safety". Yet, these companies became so popular, shares were trading at "rich" valuations - Avon Products, Kodak, Xerox, Disney and even McDonald's at one point traded at sky high valuations.