The broad U.S. stock indexes are weighted by market capitalization, which can work out well during a bull market, as success is rewarded and index-fund investors have growing allocations to the large-cap stocks that have risen the most. But it can also concentrate a high percentage of your money into a handful of companies.
You might be happy with a low-cost fund that tracks the S&P 500 SPX. After all, the average annual total return for the $408 billion SPDR S&P 500 ETF Trust SPY has been 12.5% over the past 10 years through Monday, according to FactSet. For the entire 10-year period, SPY’s return has been 225%. Long-term investors who have been thrilled with the performance of SPY and QQQ over the years might also worry about a 2022-like scenario, when SPY fell 18.2%, led by the S&P 500 information-technology sector, and QQQ dropped 32.6%.
Keep in mind that this is only a three-year performance snapshot and that a longer history wouldn’t really be valid, because SPGP’s strategy changed in June 2019. Its outperformance against SPY and QQQ reflects its better performance during the bear market of 2022. So far this year, SPGP has returned 13%, trailing returns of 38% for QQQ and 17% for SPY. This in part reflects QQQ’s very heavy concentration to the largest tech-oriented companies.
SPGP tracks the S&P 500 GARP Index, which is maintained by S&P Dow Jones Indices. The stock-selection methodology begins with the full S&P 500. Companies are ranked by growth scores based on increases in earnings per share and sales over the trailing 12 reported quarters. After narrowing the list to 150 companies scoring highest for growth, S&P Dow Jones Indices does further screens based on the companies’ returns on equity and ratios of debt to equity and price to earnings.
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