Passively managed funds have continued to thrive this year, with Vanguard recording almost £1.6bn in sales in the .
Of the many passive funds on offer, S&P 500 trackers have proven highly popular, with investors keen to access the world’s top-performing stock market.
Performance of market indices over the past year
Source: FE Analytics
However, experts caution against putting all your eggs in the S&P’s basket. The index remains dominated by the ‘Magnificent Seven’, which may be vulnerable to regulatory headwinds. As a result, concentration risk remains high, meaning that a healthy portfolio should embrace diversification.
Below, expert fund selectors outline their favourite funds to hold alongside a more traditional S&P 500 tracker, with funds in the IA North American Smaller Companies sector proving particularly popular.
Dodge & Cox US Stock Fund
Chris Proudfoot, investment manager at Fundhouse, said diversifiers to the S&P 500 need to differ from it “stylistically, sectorally and on a market-cap basis”. One strategy ticking all those boxes is the £2.9bn Dodge & Cox US Stock fund.
Over the past half a decade, the fund has delivered 88.1%, whereas the S&P 500 was up by 107.6%.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Proudfoot believes the strategy serves as a great diversifier due to its distinct sector composition. Dodge & Cox aims to find companies trading below their estimated fair value, which leads the portfolio to favour financials and healthcare, representing 23.8% and 22.1% of the fund, respectively. By contrast, it underweights technology.
Additionally, the team takes a pragmatic approach to value investing, looking for strong quality characteristics in their holdings. As a result, the fund holds one of the Magnificent Seven – Alphabet.
“The investment team have shown an ability to invest in a consistent manner across several cycles, and the business structure supports this,” he continued.
Nonetheless, Proudfoot said investors must prepare for this value strategy to underperform in certain market conditions.
“However, this is also why we think it offers a compelling solution as a diversifying holding,” he concluded.
Federated Hermes US SMID Equity
Shifting to the IA North American Smaller Companies sector, Chris Rush, investment manager at IBOSS, identified Mark Sherlock’s £1bn Federated Hermes US SMID Equity strategy as a good play. The fund invests in smaller companies that have the potential to grow.
Over the past three years, the fund has enjoyed a strong track record, surging in value by 23.1%, the third-best result in the peer group.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
During periods such as the 'lost decade' (2000-2010), investing in the S&P 500 would have resulted in a loss for investors. By contrast, US small-caps enjoyed an annualised return of 6.6% in this same period. This flies in the face of the “idea epitomised on various social media platforms that you can avoid taking risk by simply investing in the US index”, Rush said.
However, he admitted that the fund is likely to underperform if the largest positions in the S&P 500 thrive. Indeed, the fund has done just that, sliding into the third quartile over the past year.
“An S&P 500 index tracker does provide exposure to these areas at a very attractive price point,” he added.
For an alternative play, Rush also recommended the M&G North American Value fund, managed by experienced stock-picker Daniel White.
Artemis US Smaller Companies Fund
Sticking to the IA North American Smaller Companies sector, Dzmitry Lipski, head of funds research at interactive investor, favoured the £1bn Artemis US Smaller Companies fund. “Smaller companies are likely to benefit from [Donald] Trump’s policies as they have greater exposure to their domestic economy,” he said.
The fund has enjoyed first-quartile results over one and five years. It returned 299.8% over 10 years, the best result in the peer group.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Over 75% of the fund is in American industrials, financials, consumer and healthcare businesses, so it is well positioned to benefit from positive domestic trends such as moderating inflation and interest rates.
Lipski sees it as a great long-term play, since smaller companies tend to outperform the market over longer time periods. “With a focus on long-term capital growth, investing in US smaller companies is a great choice for longer-term investors”, he concluded.
For investors looking for something different, he said the Invesco S&P 500 Equal Weight ETF provides competitively priced exposure to US blue chip stocks.