Warren Buffett famously quipped that diversification is for people who don’t know what they’re doing. Judging by the explosive growth of S&P 500 ETFs over the past few decades, millions of investors are perfectly fine playing dumb — and their retirement accounts are thanking them for it.
After all, beating the market year after year is incredibly hard. Even Warren Buffett couldn’t do it consistently. He’s considered the GOAT of long-term investing for good reason. Between 1964 and 2024, Berkshire Hathaway (BRK.B) delivered an overall gain of more than 5,500,000%, or a compound annual gain of nearly 20%. By comparison, the S&P 500, the main benchmark for U.S. stocks, gained 39,000% and 10%, respectively.
Doubling the performance of the broader market over a six-decade span is an investing feat that may never be repeated. And yet, Berkshire stock still trailed the S&P 500 in 20 of those years, once by as much as 40 percentage points.
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Needless to say, most professionals come nowhere close to Buffett’s run. Actively managed mutual funds have a poor track record when it comes to beating their benchmarks. Over the past 20 years, 93% of U.S. large-cap stock funds lagged the performance of the S&P 500, according to S&P Global.
There are a lot of reasons that most portfolio managers can’t beat the market, but perhaps the most important is that most stocks can’t beat the market.
Between 1990 and 2020, more than 55% of all U.S. stocks underperformed risk-free, one-month U.S. Treasury bills, according to Hendrik Bessembinder, professor of finance at Arizona State University’s W.P. Carey School of Business. These stocks didn’t just lag the S&P 500; they failed to beat cash.
Even more distressing, the entirety of the $76 trillion in net global stock market wealth created over that three-decade period was generated solely by the top-performing 2.4% of stocks.
As Vanguard founder Jack Bogle liked to say: “Don’t look for the needle in the haystack. Just buy the haystack!”
It took a while for the investing masses to embrace Bogle’s advice, but passive investing finally came into its own. In 2006, S&P 500 ETFs collectively held about $80 billion in assets under management. Today, that figure stands at about $2.7 trillion.
Thanks to their low fees — and a remarkably resilient secular bull market — investors who’ve settled for “merely” market-matching returns have had a strong run these past 20 years.
The bottom line on S&P 500 ETFs?
Although the Vanguard S&P 500 ETF (VOO) is the largest S&P 500 ETF by assets under management, it didn’t begin trading until 2010. Therefore, we’re going to go with the granddaddy of them all — the SPDR S&P 500 ETF Trust (SPY) — to see what broad exposure to U.S. equities has done for buy-and-hold types these past two decades.
Have a look at the above chart and you’ll see that if you’d put $1,000 into the SPY 20 years ago, it would today be worth more than $8,500. That’s good for an annualized return of 11.2%. (The S&P 500’s total return — price change plus reinvested dividends — came to 11.3% over the same span. S&P 500 ETFs trail their benchmark because of fees and cash drag from unpaid dividends.)
Since 1928, the market’s rolling 20-year compounded annual returns have been as high as 17.7% (1980-1999) and as low as 2.6% (1929-1948), according to Nicholas Colas, co-founder of DataTrek Research.
“The fate of the next 20 years for the S&P 500 is largely reliant on the development of artificial intelligence and whatever innovations come after it, and the ability for U.S. companies to generate substantial profit from these technologies,” he notes. “We remain optimistic and are long-term bulls on U.S. large-cap stocks.”
