It Is Possible To Beat The S&P 500
Most investors know of the S&P 500 as a broad base allocation to U.S. stocks, typically accessing these companies through an index fund or ETF. Based on the name and its reputation, it would make sense to think that you are investing into the five hundred largest stocks in the U.S.
Enter S&P 500 into google search and the first result shows Wikipedia describing the S&P 500 Index as “tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.”
As of 29 February 2024, of the 500 largest U.S. stocks by market capitalisation, only 427 were included in the S&P 500 index. The 73 companies that were excluded represents $2.1 trillion in market value, which is 25% more than the entire value of the Australian stock market.
Most investors are surprised to find out that passive investing is active. S&P Dow Jones Indices (S&P DJI) maintains the S&P 500 index and an index committee decides which companies get to elected as part of the index. There is no way of knowing which companies are going to be included into the S&P 500 index, unless of course, you work for S&P DJI and have insider information.
Beating the S&P 500
Because of the active management decisions behind the S&P 500 index, it has given investors an opportunity to do better.
Since 1960, The Center for Research in Security Prices (CRSP) is the leading provider of total stock market representation through its indices. The CRSP deciles 1-5 has similar capitalisation parameters to the S&P 500 without excluding stocks based on the index committee recommendations, thus providing a better representation of U.S. stocks by market capitalisation.
Comparing the performance of both indices, we can see that over the past two decades or so, a proper representation of the largest equity companies listed on all U.S. exchange has yielded a performance advantage. An example, for all rolling 2-year periods since the year 2000, the CRSP Decile 1-5 Index has done 0.13% per-year better than the S&P 500 Index.
You can further improve performance through a daily process that prioritises risk of every single security and targets securities with higher expected return. A flexible trading policy will help investors to not overpay for securities whilst preserving all the advantages of passive investing such as broad diversification and cost savings. Click here to find out how to invest better.
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