Key insights
- The article argues that actively managed funds consistently underperform the S&P 500, with over 90% failing to beat the index over 15 years. It advocates for passive investing through low-cost ETFs like Vanguard's VOO, which replicates the S&P 500 with minimal fees. This strategy allows investors to capture market returns without the high costs and underperformance risk associated with active management. The piece highlights the simplicity and cost-effectiveness of passive index tracking for long-term wealth accumulation.
Trying to outperform the stock market during any single calendar year usually has less than a 50% success rate. Stretch that out to a period of multiple years, and the success rate gets even worse. Over the typical 10-year investment period, it's almost not even worth trying.
According to the latest SPIVA U.S. Scorecard, published twice a year by S&P Dow Jones indexes, the underperformance rate for actively managed large-cap funds exceeds 90% over a 15-year time frame.
This is how exchange-traded funds (ETFs) experienced their big boom. By paying razor-thin expense ratios on passively managed index funds instead of paying fees that often exceed 1% on actively managed funds, investors could keep more performance for themselves instead of sending it to a financial advisor.
That logic still applies. Why pay big fees to very likely underperform the S&P 500 (^GSPC +0.22%) when you can simply try to match it instead? That's why investors should stop trying to beat the S&P 500. Just buy the Vanguard S&P 500 ETF (VOO +0.23%) instead.
The biggest feature of the Vanguard S&P 500 ETF is its simplicity. It replicates the S&P 500 index and charges a minimal 0.03% expense ratio for doing so. What investors end up getting is broad exposure to the large-cap U.S. stock market at almost no cost.
Actively managed mutual funds often charge 1% or more in management fees. That directly eats into shareholder returns and is the single biggest reason they underperform over the long term. Actively managed ETFs are better in fees. Many charge half that or less, but it's still a potentially unnecessary performance drag.
The Vanguard S&P 500 ETF allows investors to keep almost everything their investment earns. It's about as close to replicating the performance of the index with minimal fee drag as you'll get.
If there's any potential downside to investing in the S&P 500 right now, it's that tech accounts for more than one-third of the portfolio and the vast majority of the top 10 holdings.
But that's where the U.S. economy is headed right now. The artificial intelligence (AI) boom is driving revenue, earnings, and efficiency growth. That makes the Vanguard S&P 500 ETF a fund built for now and for the future. Even professional money managers have a tough time beating it.