Investing in the S&P 500: Beating the Benchmark
Introduction:
Beating the S&P 500 is the ultimate goal for many investors, but achieving consistent success in this endeavor is incredibly challenging. The S&P 500, often referred to simply as “the S&P,” is a widely recognized benchmark index that active investors strive to outperform. While passive investing in low-cost index funds can match the S&P’s performance, actively managed portfolios aim to generate higher returns with lower risk.
Warren Buffett’s Bet:
Warren Buffett, a legendary investor, once made a bet in 2007 that none of five hedge funds could beat the S&P 500’s return over the next decade. His prediction proved correct, as the best-performing fund only achieved a 6.5% annual return, while the worst-performing barely surpassed 0%. In contrast, the S&P 500 delivered an impressive 8.5% annual return during that period.
Finding Success:
Despite the challenges, there are actively managed funds that have outperformed the S&P 500 over extended periods. One key factor in achieving this feat is investing in funds with lower fees, as high fees can hinder performance. Here are three active ETFs that have beaten the S&P 500 over the past five years after accounting for fees.
Enhancing the S&P With Strategic Options Trading:
The Overlay Shares Large Cap Equity ETF (NYSE:) has achieved a 16.7% annual return over the last five years, outperforming the S&P 500’s 15.9% return. This ETF primarily tracks the S&P 500 but uses options trading to enhance its returns. By strategically buying and selling put options on the S&P, the fund generates income and capitalizes on market movements.
Recently, Bigger Really Has Been Better:
The Principal U.S. Mega-Cap ETF (NASDAQ:) has delivered a 16.5% annual return over the past five years by focusing on mega-cap stocks within the S&P 500. This strategy allocates more heavily to the largest companies in the index, which have outperformed the broader market in recent years.
Using Growth, and Possibly ESG, To Boost Returns:
The ClearBridge Large Cap Growth ESG ETF (NASDAQ:) has achieved a 17% annual return over the past five years by investing in growth stocks with environmental, social, and governance (ESG) criteria. This approach has capitalized on the outperformance of growth stocks and the increasing interest in socially responsible investing.
In conclusion, while beating the S&P 500 is a challenging feat, there are strategies and funds that have successfully outperformed the benchmark. By understanding the tactics employed by top-performing funds and considering factors like fees, market trends, and investment themes, investors can position themselves for potential success in the ever-evolving financial landscape.