What´s Better than the S&P 500?
A review of core equity funds
October 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Only 23.7% of U.S. core equity funds have generated a higher Sharpe ratio than the S&P 500
- Some of these are cheaper, others represent bets on factors like quality
- Some have long track records that may indicate manager skill
INTRODUCTION
The SPIVA U.S. Scorecard Year-End 2023 highlights that 88% of large-cap U.S. active mutual funds have underperformed the S&P 500 in the 15 years ending December 2023, which is a depressing fact for active fund managers. Worse, there is also no consistency in returns, i.e. the 12% of funds that have outperformed are not likely to do so again.
Furthermore, if investors want a fund that outperforms the S&P 500, they can simply buy a leveraged ETF, which outperforms the market per its design. Given this, perhaps investors should focus on risk-adjusted returns rather than outperformance (read Outperformance via Leverage).
In this research article, we will evaluate core equity funds that generated higher Sharpe ratios than the S&P 500, where we use the SPDR S&P 500 ETF Trust (SPY) as the investible index.
UNIVERSE OF CORE EQUITY FUNDS
We consider all U.S. ETFs and mutual funds focused on domestic equities as the investible universe, which represents approximately 4,500 funds. We compute the correlation of each of these funds to the S&P 500 since their launch dates and require track records of at least five years.
We define a U.S. core equity fund if its correlation to the S&P 500 is equal to or larger than 0.95, which 98 ETFs (8.2% of all ETFs) and 527 mutual funds (16.2%) have accomplished.
