As S&P 500 Soars, Diversification Trades Plummet – Validea’s Guru Investor Blog

The simple strategy of owning the S&P 500 was much more successful in 2023 than more complicated approaches, according to an article in Bloomberg. Investors poured money into the index after a 4% rally in December, pushing it to a 24% gain, with equity ETFs seeing an inflow of $69 billion during the month as well—all proof that the tried-and-true method of buying the S&P 500 and hanging onto it for a long time is still the most effective way to garner returns.

Owning the S&P 500 offers a diversified portfolio that “is probably the best way to navigate the investment climate,” says Art Hogan of B. Riley Wealth, rather than trying to “invest defensively.” Many investors sought to do just that at the start of 2023, after a dismal 2022 and a gloomy recession forecast. But as the economy remained strong, stocks soared, and were boosted even more at the end of the year by the Fed’s indication that the central bank would start slashing interest rates soon. Even at one of the S&P 500’s lowest point this year, when the index dropped 1.5% in mid-December, it still gained 0.8%, giving it eight straight weeks of gains, the longest stretch in six years. However, it’s possible that stocks have tipped into “overweight territory,” according to Deutsche Bank AG data that is cited in the article. “It’s like we’re almost in a melt-up,” David Kudla of Mainstay Capital Management said in an interview on Bloomberg Radio. Money managers are falling behind their benchmarks, desperately trying to seize on the rallies, and retail money, previously waiting in the wings, is being poured into the market, he told Bloomberg.

More than $349 billion flowed into equity funds last year, but only four S&P 500 ETFs made up over a third of that inflow—the biggest share ever recorded. Meanwhile, sector ETFs such as energy and utilities saw outflows of at least $12 billion, making 2023 their worst year ever. Only 32% of active-esque ETFs beat the S&P 500 this year, but none of their beat rates were more than 50%. In addition, options-linked ETFs that were favored early in the year because of their promise for extra yield fell short of those promises; JPMorgan’s Equity Premium Income ETF only gained 9%, far behind the S&P 500. ETFs that are focused on dividend strategies, which did so well in 2022, only took in $1.5 billion in 2023, with the $18.8 billion iShares Select Dividend ETF being among the lowest-performing funds with returns of only 0.8%. Looking back on 2023, investors should ask themselves, “‘Why did I even bother to have factor investing or sector-specific investing when had I been in the S&P 500, I would have done much better?’” Hogan of B. Riley posited to Bloomberg, adding, “There’s a lot of that reckoning that’s happening.”