In 2007, Buffett bet $1 million that he could outperform hedge fund managers over a decade by investing in an S&P 500 index fund. In 2017, he won.
Some individual investors are making similar bets on the S&P 500 with their money, either through exchange-traded funds or mutual funds.
As the name suggests, the S&P 500 includes 500 large American companies. The index is market capitalization-weighted, with each public company's weight based on the total value of all its outstanding shares. The index is rebalanced quarterly.
The three largest ETFs that track the S&P 500 — the S&P 500 ETF Trust (SPY), the iShares Core S&P 500 ETF (IVV), and the Vanguard S&P 500 ETF (VOO) — together account for nearly 17% of the U.S. ETF market, according to Morningstar.
The data shows that in 2024, VOO has been the leader in attracting new money among the three funds, with net inflows of $71 billion in the first nine months, $20 billion higher than the record set by SPY in 2023.
Will the performance of US stock index be “sluggish” in the future?
There are no shortage of headlines about the S&P 500 hitting new all-time highs in 2024. The index is up about 20% this year through Oct. 8. Over the past 12 months, it’s up 33%.
The performance exceeded some experts' forecasts, thanks in part to a stronger-than-expected U.S. economy.
“That elusive recession that everyone was looking for never materialized,” said Larry Adams, chief investment officer at Raymond James.
Now, the St. Petersburg, Florida-based company predicts a soft landing for the U.S. economy. However, the stock market rally may not continue to be so strong.
“I think you’re going to see a more muted performance in the market — still going up, but at a slower pace,” Adam said.
He said that historically, the market tends to fall by an average of about 1.5% from the beginning of October to Election Day. "The reason is that the market doesn't like uncertainty," Adam added, but "the good news is that the market tends to recover these losses and go back higher."
Goldman Sachs just raised its 2024 S&P 500 target forecast to 6,000 from 5,600 to reflect expected earnings growth, and Tom Lee, managing partner and head of research at Fundstrat Global Advisors, also recently told CNBC that he expects the S&P 500 to reach 6,000 by the end of the year.
Investing in the S&P 500 is "hard to beat in the long run"
Investing in the S&P 500 is a popular strategy.
“There are a few reasons why this strategy works so well that it will never change,” said Bryan Armour, director of passive strategies research at Morningstar.
Its advantages include low costs, capturing most of the opportunities available to active managers and being “hard to beat over the long term.” “Overall, I would say investing in the S&P 500 is a better, more diversified investment strategy than most,” Armour said.
This allows you to take a set-and-forget approach and avoid trying to time the market, he said.
However, there are certain risks associated with investing solely in an S&P 500 index fund on the stock side of your portfolio.
“For the last seven or eight years, investing in the S&P 500 was absolutely the best thing (investors) could have done,” said Sean Williams, a certified financial planner and principal at Cadence Wealth Partners in Concord, North Carolina. “There are a lot of people who also have the mentality of, ‘Why would I do anything different?’ ”
Williams said that in general, it is not a good idea to put all your eggs in one basket, even in large U.S. companies that have performed very well over the past decade. It is always helpful to have exposure to other areas, such as international assets, small and medium-sized companies and real estate.
Strategies that invest in the S&P 500 come with concentration risk. For example, information technology companies including Apple, Microsoft, Nvidia, and Broadcom make up 31.7% of the index.
To reduce this risk, investors might consider moving to a total market portfolio like the Vanguard Total Stock Market ETF (VTI), which can reduce portfolio concentration.
Additionally, for broader exposure, investors can also consider buying small-cap value stock ETFs, a sector Morningstar analysts currently view as "significantly undervalued."
The article is forwarded from: Jinshi Data