Have S&P 500 Index Funds Lost their Sparkle?

In 1976, the Standard and Poor's 500 became the first stock market index tracked by a fund when Vanguard launched its legendary Vanguard 500 Index Fund (VFINX), which began with just $11 million and grew to become the largest U.S. equity mutual fund in existence through the late 1990s.

The year 92 saw the first successful launch of an exchange-traded fund (ETF). It, too, tracked the S&P 500. Nearly a quarter century later, and largest ETF in existence is SPY, that tracks — you guessed it — the S&P 500.

The Granddaddy of all Indexes Rules the Index ETF World

According to Forbes, the S&P 500 holds direct index assets of nearly $2 trillion, with an astounding $5 trillion benchmarked to the index, including types. The S&P is the most important and many watched index in the world. The actual 500 mostly-U.S. companies this tracks are the most liquid in the world, and the index is the central indicator of the health and temperament of the overall stock market.

As index ETFs soared in popularity due to their low cost, simplicity and diversification, the funds that monitor the S&P 500 naturally rose to the top of the catalog fund world.

However, for many index fund investors, the honeymoon vacation period may be ending.

The S&G 500 Misses Much of the actual U.S. Market

As Forbes recently stated, the 500 companies monitored by the S&P 500 signify around 80 percent of all market capitalization in the United States, which, on the surface, makes it a logical vehicle for investors looking to capture a large swath of the U.S. market. However, the reality is, the S&P 500 tracks just a fraction of the nearly 4,000 Ough.S. stocks that are exchanged on the market.

Index funds that track the S&P miss literally thousands of mid-cap, small-cap and micro-cap stocks. Money like the Vanguard Total Stock Market Index (VTSMX), which capture more than 99 percent of the market, have filled that void — and these comprehensive index ETFs are luring more and more investors away from traditional S&P 500 funds.

The S&P 500 is Still Good, however no Longer Unbeatable

MarketWatch points out that in the year 2000, when index ETFs began gaining widespread, popular popularity, the S&P wasn’t just the most famous index, but it also displayed the performance in order to back up its popularity with catalog investors. In the two decades prior to the turn of the millennium, the S&P 500 experienced compounded at 18 percent. During the last five years of the 1990s, it compounded at a staggering 28.6 percent.

However, that was after that.

In the ensuing 15 years, the S&P 500 has been great — but not good, enough to warrant its continuing position as the go-to index ETF for domestic stocks. Many investors who’ve purchased nothing but S&P catalog funds are now dusting off their budget planner worksheets to see if they could have done better with other domestic Exchange traded funds. It turns out, they probably could have.

After all, eight of the Ten Vanguard funds that MarketWatch profiled beat the actual Vanguard S&P 500 index fund over the last 15 years.

The S&P remains the most important stock market index in the world, and the funds that track it are safe, profitable, and as popular as ever. However, more and more index investors are falling out of love as other funds offer them everything in the actual S&P 500, plus the other 3,500 stocks within the lower 20 percent that the S&P misses.