Professional money managers are some of the brightest minds on Wall Street. Top investment funds can demand some pretty hefty fees to compensate those managers and their teams of analysts, plus pay for all the marketing that goes behind selling their services. Still, some will find the trade-off of high fees worth it for access to a Wall Street superstar.
But if you want investment results just as good or better than the vast majority of professionally managed funds, you don't need to find the next stock market genius or learn to outsmart Wall Street yourself. There's an inexpensive exchange-traded fund (ETF) that has outperformed over 86% of professionally managed large-cap funds over the past five years using a simple method for selecting stocks.
And even better for readers, it should perform well above average for years to come.
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The ETF that's hard to beat
Most large-cap funds use a benchmark index to measure their relative performance. The reason investors pay those high fees is that those funds can supposedly outperform that benchmark by enough to more than make up for it.
Unfortunately, that's rarely the case, especially among large-cap stock funds. As a result, roughly 54% of large-cap funds underperformed the S&P 500 (^GSPC +1.20%) during the first half of 2025 when accounting for fees, according to data from S&P Global. And the numbers generally get worse over time. Over the last five years, 86.9% of funds underperformed the benchmark after fees.
You might have put together by now that the ETF that can consistently outperform most professionally managed funds is an S&P 500 index fund like the Vanguard S&P 500 ETF (VOO +1.23%). With its expense ratio of just 0.03% and low tracking error, it has effectively matched the S&P 500's returns over the last half decade.
But it's not just happenstance that professionally managed funds have underperformed the S&P 500 recently. There are systemic reasons why the vast majority of professionally managed funds will underperform the index over time. That's evidenced by the 20-year track record of professionally managed funds: 91% underperformed over the last two decades. And I'd bet the next 20 years will look pretty similar.
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Key Data Points
Why it's so hard for professionals to outperform
There are a couple of main reasons why it's so hard for a professional fund manager to outperform the S&P 500 over the long run.
The first challenge is the competition in the market. When a professional fund manager wants to buy or sell a stock, they need to find someone else to buy it from or sell it to. More often than not, that's another professional investor who's just as educated, has their own team of highly trained analysts, and also expects to outperform the market. Of course, since they're taking opposite sides of a trade, they can't both be right.
Since professionals are mostly competing against one another directly, the odds that any random fund outperforms the S&P 500 before fees is close to about 50/50. But when you add in the expense ratios for each fund, those odds drop considerably. It's rare that the majority of large-cap funds outperform the index in any given year. You have to go back to 2009 to find the last time it happened.
The second major challenge for professionally managed funds is the paradox of success. If a fund outperforms in one year, it'll attract attention, which brings more capital. More capital limits the investment options for a fund manager and may require spreading investments to less attractive stocks to keep more cash invested. The result is a decline in performance in subsequent years. This phenomenon, combined with mean reversion, has played out time and time again in the stock market, with top-performing funds in one year moving to the bottom in the next year. None of the funds performing in the top quartile remained at that level over the next four years, according to S&P Global.
The simple path to outperformance
The numbers show there are fund managers who earn their keep -- 13% have outperformed the index over the last five years and 9% have beat the market over 20 years. The problem for investors is that it's practically impossible to identify those funds and their managers ahead of time.
The simple solution is to stick with the index fund. The Vanguard fund has a great track record of tracking the index closely, ensuring your returns will match the S&P 500's returns no matter when you invest. Consistently adding to a position in the ETF could set you up to outperform the vast majority of Wall Street once you account for fees.
It doesn't have to be complicated if you want to outperform the professionals.
