united kingdomen
Rising up against passive S&P 500 strategies

Rising up against passive S&P 500 strategies

20-12-2018 | Insight

Many equity investors are giving up on active management. In the US, a popular approach is to settle for a passive strategy based on the well-known S&P 500 Index. However, we think factor investing provides a much more compelling alternative.

  • Jan de Koning
    de Koning
    Portfolio Manager
  • Bart van der Grient
    van der Grient

Speed read

  • Replicating the S&P 500 has merits and drawbacks
  • Robeco’s Enhanced Indexing strategies address the drawbacks
  • Delivering consistent outperformance with a low tracking error

In recent years, going passive seems to have become the default option for many equity investors, in particular in the US. As the largest and most liquid equity market in the world, the US stock market is also often perceived as the most efficient one, making it very difficult for active investors to consistently outperform the market.

In this context, passive investment strategies that replicate the popular S&P 500 Index have thrived, commercially speaking. Currently, a total of over USD 3.4 trillion is invested in passive vehicles that track this well-known index, according to the latest Annual Survey of Assets by S&P Dow Jones Indices. Vehicles that track the S&P 500 are widely available at low costs, sometimes as low as just a few basis points.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates

Settling for the S&P 500 Index?

The appeal of passively tracking the S&P 500 is clear: the index offers exposure to liquid large-cap stocks from different sectors that represent over 80% of the total market capitalization of US equities. Moreover, investors don’t need to engage in extensive and expensive manager due diligence. Given its transparency, the passive portfolio does not hold any surprises in terms of sector or individual stock weights.

Investors should not settle for the S&P 500 Index

With such characteristics, it is not surprising that active managers face a strong opponent when competing for assets. And given the steep fees active managers sometimes charge, they actually start at a disadvantage. At Robeco, however, we argue that investors should not settle for the S&P 500 Index and that factor-based investing can provide a much better alternative.

Four key characteristics

To beat the S&P 500 Index after costs, consistently over time, a strategy should feature four key characteristics. First, it should include exposure to low relative risk, capturing a manager’s skill in the most efficient way by only allowing small deviations from the reference index. Second, it should have low costs, as costs can soon cancel out potential relative gains from such small deviations. Third, the strategy should provide efficient exposure to academically proven factors of return, such as value, momentum and quality. Finally, there should a disciplined quantitative implementation process, as the portfolio manager will have to continuously assess the potential of hundreds of stocks.

Robeco’s Enhanced Indexing strategies feature these characteristics, while also integrating sustainability criteria. Since 2004, these strategies have proven their ability to deliver stable and sustainable alpha after costs when applied to broad investment universes such as global developed and emerging stocks. But carve-outs of their realized performance show that our Enhanced Indexing strategies also work in narrower investment universes. This holds true even in the very efficient US stock market, making enhanced indexing a compelling alternative to passive S&P 500 strategies.

Read the related article: ‘How can you beat the S&P 500?’



Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.

In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

I Disagree