S&P 500 investors vs. actively managed funds: 2024 is an even better year for buying and holding the index (2024)
In the running debate between actively managed funds versus simply investing in a fund that tracks the S&P 500, the scorecard continues to tilt toward the broad stock market index.
According to data from Morningstar Direct, just 18.2% of actively managed funds whose primary prospectus benchmark is the S&P 500 managed to outperform the index in the first half of this year.
That’s on track to be worse than last year, when only 19.8% of actively managed funds beat the S&P 500.
Of course, some years are better for fund managers than others. In 2022, when the Federal Reserve launched its most aggressive rate-hiking cycle in decades and sent the S&P 500 tumbling, 63.3% of active funds outperformed. In 2014, only 14.2% did.
Over the past 10 years, the average share of active funds that beat the S&P 500 was 27%, setting up 2024 to be an especially weak year.
Data from Morningstar Direct also shows that 13.4% of passively managed funds are outperforming so far this year. And over the past decade, passive funds consistently trailed active funds in the share that beat the S&P 500.
But that’s not surprising given that many passive funds are only looking to keep pace with the index and maintain lower expenses rather than charge higher fees and hope that they get bigger returns.
To be sure, the vast majority of the S&P 500’s recent gains have come from just a handful of tech giants. That leaves index investors vulnerable to a selloff in one stock like Nvidia. Still, even as Nvidia has come well off its highs over the past few weeks, the index has continued to hit fresh records as other stocks climbed.
In addition, funds that are diversified across asset classes and geographies also fared worse than the S&P 500. Such portfolios have lagged the index in 13 of the last 15 years, according to data from Cambria Funds cited by Bloomberg. Other data showed that out of 370 asset-allocation funds tracked by Morningstar, just one has beaten the index since 2009.
“In a low-volatility, high-return environment like 2024, investors should stick to the basics — buying uncomplicated index funds, and active mutual funds with a proven track record of delivering alpha,” Evercore strategist Julian Emanuel told Bloomberg last month. “No need to complicate strategy. In simplicity there is beauty.”
For long-term investors: Index funds can be a solid choice for building wealth over time. For experienced investors: Actively managed funds might be an option if you have the time and knowledge to research them carefully and understand the higher risk involved.
The market is surging, but is now really the best time to buy? The S&P 500 (^GSPC -1.73%) has been booming over the past year and a half, currently up by nearly 50% from its low in late 2022. The index has also reached two dozen all-time highs throughout 2024, its most recent in late May.
Our recommendation for the best overall S&P 500 index fund is the Fidelity 500 Index Fund. With a 0.015% expense ratio, it's the cheapest on our list. And it doesn't have a minimum initial investment requirement, sales loads or trading fees. Over the last 10 years, FXAIX has returned an annualized 12.82%.
Conventional wisdom holds that when you hit your 70s, you should adjust your investment portfolio so it leans heavily toward low-risk bonds and cash accounts and away from higher-risk stocks and mutual funds. That strategy still has merit, according to many financial advisors.
According to data from Morningstar Direct, just 18.2% of actively managed funds whose primary prospectus benchmark is the S&P 500 managed to outperform the index in the first half of this year. That's on track to be worse than last year, when only 19.8% of actively managed funds beat the S&P 500.
Yet active managers haven't become better at beating the market over the long term, as Morningstar acknowledges. While the percentage of market-beating funds fluctuates significantly from year to year, the proportion beating over 10- or 20-year periods is still low.
ETFs are more tax efficient and lower cost. They passively follow the market index and don't have a person (a fund manager) actively trying to avoid market bumps, like you get with a Managed Fund.
The Needham Aggressive Growth Retail fund beat the S&P 500 index over the past one-, three-, five- and 10-year periods. Its 10-year average return was 12.78%. Barr likes companies with a profitable legacy business that can support an investment in a new thing that will pay off down the road.
How to invest in the S&P 500. The easiest and most efficient way to invest in the S&P 500 is via a low-cost exchange-traded fund (ETF). Several ETFs track the S&P 500, but the oldest and most popular is the SPDR S&P 500 ETF Trust (SPY).
Is it too late to invest in the stock market? While stock prices are up significantly compared to a year or two ago, the good news is that with the right strategy, there's never necessarily a bad time to invest. Building wealth in the stock market is a long-term strategy.
The annual S&P 500 average return in 2023 was 24%. So far, the average return for 2024 is around 19%. "Investing can be a good way to grow wealth over the long term and offers the potential for higher returns compared to a typical checking or savings account," says Jordan Gilberti, CFP and senior lead planner at Facet.
Introduction: My name is The Hon. Margery Christiansen, I am a bright, adorable, precious, inexpensive, gorgeous, comfortable, happy person who loves writing and wants to share my knowledge and understanding with you.
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