Does This Specialized ETF Beat the S&P 500?

I came across the iShares S&P 100 ETF (OEF) during some research for my 401k. OEF is an ETF for the top 100 largest US companies, it includes mega cap companies like Apple, Microsoft, Johnson & Johnson, Exxon Mobil, Berkshire Hathaway, Amazon, JP Morgan Chase and so on. This ETF sparked a hypothesis worth testing: do the top 100 companies consistently outperform the top 500? If the answer is yes, then it would be better to make OEF a major position in my 401k over the current S&P 500 mutual fund (FUSVX).


To test I did a quick analysis of the annual returns of OEF and SPY (SPY is an ETF replicating the S&P 500):

Annual Returns of OEF ETF vs SPY ETF

As you can see SPY is clearly the winner, it outperforms in 11 out of the 16 years tested (a 69% win ratio). Also since 2001 the difference in cumulative returns between the two investment options is significant with SPY returning over 30% more. There is no edge here, I conclude that investing in the full S&P 500 index is much better over the long term than just the top 100 companies in the index.


I think the market in general pretty much knows this already, the daily trading volume for SPY over 76 million shares while for OEF its only about 139k. The trading volumes indicate as a whole that money mangers, traders, investors and even the machines all think there is more money to be made in SPY than in OEF. The take away lesson I get from this is don’t ever put any money into the OEF ETF.



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