One way to seek outperformance of the index is by sector allocation.
Keep in mind the S&P 500 is part of the large cap portion of your assets.
CLICK TO ENLARGE As shown by the graphic, the index is comprised of 10 sectors: Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecom Services, and Utilities.
To outperform the Index, the sector weightings are key. In fact, thinking through how the various sectors perform in different environments is useful mental activity. Market followers know how the energy sector has performed and what happened to the financial sector in 2008. They know, as well, the important difference between consumer discretionary and consumer staples in different environments.
At this point, most of you know where this is headed.
If you think you can analyze sectors of the macroeconomy and predict which will do better, then it is very easy to position a portfolio accordingly by using sector indexed ETFs. Please note that I am not recommending this - it is more difficult than it looks.
Using ETFs to Over and Under weight S&P 500 Sectors
Over and underweighting of sectors of the S&P 500 is easily accomplished using SPDR select sector ETFs. They index the S&P 500 with the 9 sectors shown, and each ETF has an expense ratio of 0.20%.
CLICK TO ENLARGE If you like to follow markets and feel you have a talent to predict sectors, then play around with sector prediction on paper. Simply rank the sectors by expected performance over the next month; and after a few months, you'll have some insight into how talented you are. More ambitious would be to actually put weightings on the sectors corresponding to the strength of your beliefs. Performance can be found at Select Sectors SPDRs performance.
Disclosure: This information is intended for educational purposes only. No recommendations are made. Individuals should do their own research or consult with an advisor before making investments.