Myth-Busting the S&P 500 Index In Three Charts
The S&P 500 Index is one of the most widely tracked benchmarks in the world. It represents 500 of the largest publicly traded companies in the United States, selected based on a mix of quantitative screens, like market capitalization, liquidity, and earnings history as well as a subjective review by a committee.
The result is a curated, rules-based snapshot of large-cap U.S. equity performance. It's also big business. Trillions of dollars are tied to S&P 500–linked products including mutual funds, ETFs, index futures, and listed options.
Today’s article highlights three data-driven charts that reveal some of the most underrecognized features of the index in its current form. If you're thinking about allocating new capital to U.S. large-cap equities and the S&P 500 is on your list, these are details worth knowing.
“Improving” the S&P 500 Has Mostly Underdelivered
If the S&P 500 has been such a great investment, surely adding a few smart tweaks should make it even better, right? That’s been the theory behind dozens of factor-based spinoffs. But as the following chart shows, most attempts to improve on the index have fallen short.
The result is clear: despite the proliferation of index variants targeting low volatility, dividend growers, value, equal weight, and quality, none of these strategies have been able to consistently outperform the plain vanilla S&P 500 in recent years.
Growth, the lone outperformer, is already embedded within the standard index, especially in recent years, where mega-cap tech stocks have dominated.
This reinforces the idea that much of the "enhancement" promised by alternative index constructions often ends up just repackaging exposure already found in the core benchmark.
It's also worth noting that this chart reflects index-level performance. In real-world investing, you gain exposure through ETFs or mutual funds, many of which carry higher expense ratios for these enhanced strategies.
When fees are factored in, the performance gap typically widens further against the standard S&P 500 ETFs, which are among the lowest-cost options available. Complexity doesn’t always translate into better returns.
The S&P 500 Isn’t the Only Game in Town
While many alternative versions of the S&P 500, like low volatility or equal weight have trailed the plain vanilla index, that doesn’t mean all benchmarks fall short.
The chart below compares the S&P 500 Total Return Index to three rival large-cap U.S. equity benchmarks from CRSP, MSCI, and Bloomberg. Despite tracking slightly different universes with varied methodologies, all four delivered nearly identical results over the past decade.
When it comes to U.S. large-cap core exposure, owning the “official” S&P 500 isn’t necessarily better. Each index captures broadly similar groups of companies using market cap weighting, which tends to produce similar long-term outcomes. The advantage to having alternatives is flexibility, especially for things like tax-loss harvesting or portfolio construction.
Just don’t confuse popularity with superiority. Over the long run, the historical performance gap between these indices has been minimal.
A 100% S&P 500 Portfolio Is Harder to Hold Than It Looks
The S&P 500 may be the poster child for long-term equity investing, but it hasn’t been a smooth ride in the slightest.
Since inception, the benchmark has posted an annualized volatility of 15.68% and a max drawdown of 55.25%. That level of risk is tough to stomach, even if the long-run returns look appealing on paper.
In practical terms, a historical investor fully invested in the S&P 500 would have endured periods of intense stress, including seeing more than half their portfolio’s value evaporate during major drawdowns.
Riding out a 55.25% drop without selling requires an uncommon level of discipline. Many investors, especially those new to the market or nearing retirement, would likely capitulate well before the recovery. That’s why those long-run returns often exist more in theory than in practice.
Those headline returns also assume perfect behavior, what’s called a time-weighted return. But most investors experience money-weighted returns, meaning results are skewed by when you buy, sell, and reinvest. Emotional decisions, panic selling, or poor timing can drag actual performance well below the benchmark.
Going all-in on equities is a bold move, but diversification is easier than ever. ETFs now offer simple, low-cost exposure to fixed income and inflation-resistant real assets.
About Us
Jay D. Hatfield is CEO of Infrastructure Capital Advisors and is the lead portfolio manager of the Infrastructure Capital Bond Income ETF (NYSE: BNDS), InfraCap Small Cap Income ETF (NYSE: SCAP), InfraCap Equity Income Fund ETF (NYSE: ICAP), InfraCap MLP ETF (NYSE: AMZA), Virtus InfraCap U.S. Preferred Stock ETF (NYSE: PFFA), InfraCap REIT Preferred ETF (NYSE: PFFR) and private funds. Each month Infrastructure Capital hosts a monthly economic webinar; you can sign up to attend by visiting our website www.infracapfunds.com (important disclosures can also be found on the website). For a prospectus please reach out to us or visit the links above for each respective fund.
DISCLOSURE
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