Can You Beat the S&P 500? The Answer Might Surprise You
The S&P 500 is a highly efficient and well-diversified benchmark that tracks the performance of around 500 of the largest publicly traded companies in the U.S. It is a widely accepted proxy for the overall market, and when people say “the market,” that’s usually what they mean.
The ultimate humble-brag for investors is “I beat the market.” However, consistently outperforming the market’s average 10% yearly return is difficult. Even the best fund managers struggle to outperform the S&P 500 in consecutive years. According to SPIVA Scorecards, 89.5% of funds underperformed the S&P 500 over the last 10 years.
Key Takeaways
- Market efficiency, diversification, and low costs make the S&P 500 hard to beat.
- Some funds beat the S&P 500 in an individual year, but can not consistently outperform the S&P 500 long-term.
- Striving for diversification, dividend growth, and a buy-and-hold approach usually produces better outcomes than trying to beat the S&P 500.
- Investing based on your risk tolerance, goals, and timeline is more important than winning the returns race against the S&P 500.
Why Is It So Hard to Beat the S&P 500?
The only way to beat the S&P 500 is to buy lower and sell higher. While that might be possible in any given year, consistently beating the market boils down to a few built-in advantages of the S&P 500, which are hard to replicate:
Market Efficiency
In an efficient market like the S&P 500, current prices reflect all public, relevant information (earnings reports, interest rates, breaking economic news, and even CEOs’ tweets) in the underlying assets’ value.
The more information that becomes available and the quicker the information gets into the hands of investors, the faster asset prices move to keep up, significantly reducing arbitrage opportunities.
The S&P 500 is one of the world’s most liquid markets, with billions of dollars in daily trading activity. Analysts and even algorithms constantly scan the market for price discrepancies and exploit them within milliseconds, leading to extremely high trade volumes and sometimes razor-thin profit margins that add up over time.
Diversification
The S&P 500 represents the 500 largest and most influential companies in the U.S. across all 11 global industry classification standards (GICS) market sectors. The S&P 500’s inherent diversification helps smooth volatility and protect the portfolio from huge price swings in any one sector or industry. Following 500 companies looking for profit opportunities is a tall order for even the best fund managers, so funds and individual portfolios will likely be more concentrated.
Active vs. Passive Management
Investors and funds may try to pick winners, time the market, and beat the S&P 500 with active management strategies. The success of the actively managed portfolio relies on the skill of the management team or investor in extrapolating data and predicting market movements. However, fund managers don’t have a crystal ball, and their decisions are subject to human error. They may also respond erratically to economic news.
Cost and Fees
Passively managed funds that track indices like the S&P 500 typically have much lower fees than actively managed portfolios.
Active management strategies require frequent trading, which means higher fees, whether investors choose a fund or try to replicate the results themselves. Funds using active management often charge as much as 1% or more, which eats into returns and makes beating market returns much more of an uphill battle.
Note
A 1% expense ratio might not seem too expensive, but the difference can substantially impact returns over time compared to low-cost index funds charging as little as .03%, like Vanguard’s S&P 500 ETF (VOO).
Timing the Market
The phrase “time in the market beats timing in the market” gets passed around more than colds in an office for good reason. Even the best investors and portfolio managers can struggle to predict when to buy and sell.
Market movements are not linear; historically, they move more like someone bouncing a ball while walking upstairs, and missing the upward catch can mean missing out on major gains or losing big. Many of the market’s biggest gains happen in short bursts—often when investor confidence is low. But if you wait too long or try to predict the perfect moment, the opportunity can disappear in a flash.
Tracking the S&P 500 does not involve jumping in and out of the market at every news cycle or economic update. Lefty Gomez, a New York Yankees pitcher, famously said, “It’s better to be lucky than good.” In the instance of the S&P 500, good investors can create their own luck by not trying to predict wins and allowing the S&P 500 to do the work for them.
5 Funds That Beat the S&P 500 in 2024
Beating the S&P 500 is hard, but not impossible, especially in any given year. The S&P 500 finished 2024 with a more than 24% return, but several funds knocked it out of the park.
Alger Focus Equity Fund I ALGRX
2024 performance: 51.8%
Investment strategy: ALGRX focuses on long-term appreciation by seeking investment opportunities that demonstrate positive growth potential. Trusting AI’s emerging advancements and importance helped catapult returns for ALGRX in 2024.
Top holdings: Microsoft, Nvidia, Meta, and Amazon
Invesco S&P 500 Momentum ETF SPMO
2024 performance: 45.81%
Investment strategy: This S&P 500 benchmark fund tracks the large-cap equities in the market with the highest momentum score, rebalancing only twice per year.
Top holdings: Nvidia, Broadcom, Palantir, and IBM
American Century Focused Dynamic Growth ETF (FDG)
2024 performance: 45.65%
Investment strategy: FDG notes, “Our bottom-up investment process seeks to uncover companies with durable competitive advantages we believe offer opportunities for higher and sustained growth.”
Top holdings: Nvidia, Amazon, Tesla, and Meta
Morgan Stanley US Growth Fund
2024 performance: 40.10%
Investment strategy: This fund seeks long-term growth by investing in emerging large-cap companies. They saw success in 2024 because they invested in e-commerce and technology and rode the wave of market enthusiasm.
Top holdings: Cloudflare, MicroStrategy, DoorDash, and Tesla
PGIM Jennison Technology Fund PGKRX
2024 performance: 37.66%
Investment strategy: PGKRX focuses on large-cap technology or technology-related companies. Technology had a good year in 2024, and PGKRX’s well-managed portfolio was able to outpace the S&P 500 returns.
Top holdings: Nvidia, Broadcom, Microsoft, and Apple
Strategies That Can Help You Beat the S&P 500
There are no guarantees with investing, but some investment strategies can tilt the odds in their favor, especially when executed with discipline and long-term goals in mind.
Diversification (High-Growth Assets)
A common thread among the funds’ strategies that beat the S&P 500 was that the fund managers sought out companies with growth potential and momentum. Diversifying a portfolio across many sectors to reduce the impact of volatility and investing in stocks with high-growth potential in sectors like AI, clean energy, or e-commerce can help you capitalize on opportunities without bottoming out in downturns of individual sectors.
Choosing Between Risk and Rebalancing
During bull markets, investors tend to lean into riskier investments when prices rise. As the prices continue to increase, these riskier investments take up a disproportionate share of the portfolio, leaving the portfolio’s risk vs. reward balance askew. It’s important to rebalance a portfolio during this time to help maintain balance. Additionally, when markets fall and the riskier stocks “go on sale,” buying more will benefit portfolios over time rather than selling off these stocks because you got scared.
Filling Your Portfolios With Dividend Growers
Investors quickly overlook a dividend, but savvy investors should consider investing in companies with a proven history of increasing dividends.
Note
Dividend-paying stocks provide income and capital appreciation and often outperform non-dividend-paying stocks in the long run.
‘Do-Nothing’ Portfolio
One of the most effective strategies for investment success is taking a “do-nothing” approach. Investing to beat the market relies on skill, education, discipline, and a whole lot of luck. Experiments, like the one by Jeff Ptak, showed that portfolios left untouched often beat more actively managed accounts. His theory is that investors would see more success by removing discipline, market timing, and predictions from the equation. In the period from 1993 to 2023, at least, he was right.
What Percentage of Funds Beat the S&P 500?
According to SPIVA Scorecards, only around 10% of large-cap actively managed funds consistently beat the S&P 500 over a 10-year period.
Can Financial Advisors Beat the S&P 500?
Some financial advisors may beat the S&P 500 in individual years, but consistently beating the S&P 500 is extremely rare, even for experienced fund managers.
What ETFs Are Beating the S&P 500?
ETFs with concentrated exposure to one sector, like those focused on technology or AI, may beat the S&P 500 in individual years. However, their higher exposure to only one market sector greatly increases volatility and risk.
Does Berkshire Hathaway Outperform the S&P 500?
Berkshire Hathaway, led by world-renowned investor Warren Buffett, has historically outperformed the S&P 500. For example, from 1965 to 2021, Berkshire stock’s average yearly return was 20.1%, while the S&P 500’s was 10.5%.
The Bottom Line
Beating the S&P 500 is possible, but achieving higher returns consistently is rare. Without an experienced team or extensive experience in market predictions, investors are probably better off investing with their risk tolerance, goals, and timeline guiding their choices.
Even pros struggle to beat the S&P 500. Anchoring a portfolio around a low-cost S&P 500 fund might not outperform the index, but with the market’s strong historical returns, it can still put investors ahead over time.