Not all investors are trying to beat the market. According to S&P Dow Jones Indices, a record $5.4 trillion was parked in funds that passively track the S&P 500 at the end of 2020.
Why it matters: There’s plenty of data that shows most individual investors, and even professional money managers, can’t beat the S&P 500 by actively managing their stock portfolios.
- This is why prominent investors like Warren Buffett advise followers to stick to passively managed vehicles like S&P 500 index funds.
By the numbers: At the end of 2008 during the financial crisis, there was just $915 billion worth of assets indexed to the S&P 500. The S&P closed at 903 that year.
- As passive investing has become increasingly popular, assets indexed to the S&P nearly sextupled (+493%) to $5.4 trillion in 2020 as the index itself quadrupled (+316%) to 3,756.
- About 60% of large-cap equity fund managers underperformed the S&P 500 in 2020, according to a separate report from S&P Dow Jones Indices.
- This was the 11th straight year that a majority of these professional stock pickers lagged that benchmark.
Yes but: The active fund management business is alive and well.
- Just over $8 trillion in actively managed funds use the S&P 500 as their benchmark for performance.
State of play: Even the pros who perform well in a given year are rarely able to stay on top.
- S&P Dow Jones Indices found that of active large-cap equity fund managers in the top-performing half of their peer group in 2016, just 23% remained in the top in 2017. Only 10.5% repeated the feat three years in a row.
- And just 4.2% of active large-cap equity fund managers were able to stay in the top half for five consecutive years through 2020.
The bottom line: While historical odds favor investors who only aim to match the performance of the S&P 500, the allure of beating the market will continue to have investors wagering trillions.
Editor's note: This post has been corrected to say that the assets indexed to the S&P 500 sextupled and the index itself quadrupled from 2008 to 2020 (not quintupled and tripled).
