Nothing Beat Owning the S&P 500 This Year

“It’s like we’re almost in a melt-up,” David Kudla, founder of Mainstay Capital Management, said on Bloomberg Radio.

“You’ve got professional money managers out there that are lagging their benchmarks — they’re playing catch-up and trying to take advantage of this rally to do that. Retail money is coming off the sidelines because money-market funds were paying such high yields, but now the market is doing so well so we’re seeing that money come into the market,” Kudla said.

Though equity funds have seen an overall infusion of $349 billion this year — slightly shy of 2022’s $398 billion haul — four S&P 500 ETFs have been the recipients of more than a third of the flows, the largest share ever, according to Athanasios Psarofagis, Bloomberg Intelligence ETF analyst.

It’s been to the detriment of funds tracking specific sectors like energy and utilities. Sector ETFs have seen outflows of $12 billion, their worst year on record.

Those withdrawals proved prescient. Just 31% of “active-like” ETFs — including thematic funds, ESG products, factors and actively managed vehicles — managed to outperform the benchmark index this year, on pace for the lowest beat-rate in data going back to 2014, according to Bloomberg Intelligence. None of the categories tracked by BI had a beat rate of more than 50%.

The success of broad-market indexes masked a rough year for many varieties of tactical investments, particularly those premised on safety. Options-linked ETFs promising extra yield, which entered the year as trader darlings, racked up billions of dollars in inflows but delivered tepid results.

The most famous, JPMorgan’s Equity Premium Income ETF (ticker JEPI), gained about 9% on a total-return basis, trailing the S&P by about 17 percentage points.

It was a similar story for ETFs focused on dividend strategies, which raked in more than $60 billion from defensive-leaning investors in 2022. Dividend-focused ETFs took in just $1.5 billion this year, one of the lowest hauls on record after most funds missed out on the tech-led rally and underperformed the S&P 500.

One of the worst performers is the $18.8 billion iShares Select Dividend ETF (ticker DVY), which returned just 0.8% after all-in bets on utilities and financial stocks fizzled.

“You look back on this year and say, ‘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?’” B. Riley’s Hogan said. “There’s a lot of that reckoning that’s happening.”

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