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Monday, April 25, 2011

Can You Beat the S&P 500?

The S&P 500 stands as the challenge to many in the investment world. My readers know that DIY Investor is a proponent of indexed investing and recommends capturing as close to the market return as possible by using low-cost index funds. Still, DIY sees the fun of accepting the challenge of outperforming the popular index and, in the process, outwitting the pros at their game. When it comes to retirement money, DIY believes most investors should engage no more than 20% of their investable assets in this activity.

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.

Source: www,
S&P 500 Sector Breakdown

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.

CLICK TO ENLARGE This graphic shows price performance by sector.  Notice that year-to-date Energy is up over 15% and Financials are up by less than 1%. So, to beat the index, all that had to be done was to overweight the energy sector and underweight financials. Duh! How easy is this?  But how can we implement this strategy? What stocks are in those sectors? Do we  have to pick stocks?

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.


  1. Time has proven that only the best of the best pros in the mutual fund industry can do this. But no one knows in advance who those people will be.

  2. That may be right, although I'm not totally convinced. I am convinced that after fees of the average mutual fund and excessive trading investors will under-perform over the long run. But talented people who are willing to spend the time and the resources and follow certain principles may be able to outperform over the long run.

  3. If a few can make a living playing poker, what's to stop a few faceless investors from beating the S&P 500?

    Of course these people have to invest a huge amount of time following the market.