In most portfolios, exposure to US equities is channeled through ETFs that replicate the Standard & Poor's index. This is no coincidence: they are efficient, liquid and cheap. And, above all, they represent the standard against which almost everything else is measured.

At first glance, it seems an unbeatable rival. The S&P 500 not only groups the 500 most relevant U.S. companies, covering close to 80% of their market capitalization, but also offers immediate diversification and competitive costs. That is why the vast majority of global portfolios prefer ETFs: they are vehicles that capture market dynamism simply and efficiently.

An index as hard to beat as it is to ignore

Trying to beat the S&P 500 has historically been a thankless task. The report SPIVA (S&P Indices Versus Active) reportreport, published regularly by S&P Dow Jones, shows that over a 20-year horizon, less than 9% of active U.S. managersconsistently outperform.

The numbers are just as stark over ten years: only 15% beat the benchmark. In Europe, the picture is not much different: less than 3% outperform the index over a decade.

The reasons are well known:

• Costs
• Market efficiency
• Additional risk

In short, the S&P 500 is a demanding benchmark: an index that is difficult to beat and, paradoxically, also difficult not to have in portfolios.

An exception: the TSPA case

However, there are strategies that succeed in doing so. One example is the T. Rowe Price U.S. Equity Research ETF (TSPA)based on the Structured Researchthe manager's Structured Research strategy.

His proposal is different: to maintain sector neutrality with respect to the S&P 500, so that any difference in return comes solely from stock selection (stock picking).stock picking). In practice, more than 30 sector analysts manage separate sub-portfolios within the ETF, each with its own risk and exposure rules.

The result? Since 1999, the strategy has generated an average alpha of close to +1% per yearwith a hit ratioof 77%. Even in bear markets, it has shown an 84% relative success rate, with volatility just 0.2% higher than the S&P 500. In other words, it has managed to generate excess return with virtually the same level of risk.

But it's worth putting the numbers in context. Beating the S&P 500 is possible... but at a huge cost. The alpha obtained, although positive, is usually modest (a few basis points per year) and requires a sophisticated analytical and operational structure: analysts, risk controls, discipline and consistency over the years.

In addition, part of the "premium" is explained by somewhat more demanding valuations: TSPA multiples are, on average, 0.6 higherthan those of the index. In other words, alpha exists, but capturing it requires resources, vision and consistency that only a few global managers can sustain over time.

The big conclusion: first, it is possible to earn, but rarely on a sustainable basis and with the same risk.Second, the rise of indexing is no accident: the S&P 500 has become so competitive that, for most, replicating it is still the best decision. In short, the S&P 500 remains the toughest rival to beat.

The real question is not whether it can be beaten, but whether it is really worth a try..

DISCLAIMER

Ismael Pulido
Family Office Solutions Advisor