Why using the SPY ETF as a benchmark is not desirable

The original blog post for this can be found at: Why using the SPY ETF as a benchmark is just plain silly – Swing Trader Trading

All that follows comes from the linked to post.

Why using the SPY ETF as a benchmark is just plain silly

It is common for the SPY ETF to be used as a benchmark to compare portfolio results to. But it is a big mistake to use it. Using the SPY is like comparing apples to oranges in nearly every scenario.

The SPY is a cap weighted ETF of the 500 stocks in the S&P 500 index. Because it is cap weighted, it gives oversized weight to the top 10 stocks in it. The top 10 stocks account for 30% of the value of the ETF. Very few portfolios that investors have are investing in these same 10 mega cap stocks in oversized amounts. It makes no sense to compare your portfolio to the SPY as a benchmark.

I am going to be comparing six ETF index funds:

  • SPY – Cap weighted version of the SP500 Index
  • RSP – Equal weighted version of the SP500 Index
  • EQAL – Equal weighted version of the Russell 1000 Index. The 1000 largest companies.
  • MDY – Cap weighted version of the SP400 Index
  • IJR – Cap weighted version of the SP600 Index
  • BSMAX – Cap weighted version of the Russell 2500 Index. Contains Mid and Small cap stocks.

Photo by Suzy Hazelwood on Pexels.com

The breakdown by types of stocks in each ETF:

  • SPY – 48% Giant, 35% Large, 17% Mid
  • RSP – 6% Giant, 31% Large, 59% Mid, 3% Small
  • EQAL – 3% Giant, 18% Large, 50% Mid, 27% Small
  • MDY – 38% Mid, 61% Small
  • IJR – 1% Mid, 58% Small, 41% Micro
  • BSMAX – 33% Mid, 48% Small, 16% Micro

The breakdown by percent of assets in top 10 holding:

  • SPY – 30%
  • RSP – 2%
  • EQAL – 5%
  • MDY – 6%
  • IJR – 6%
  • BSMAX – 4%

Photo by Jill Wellington on Pexels.com

To avoid unwarranted euphoria (the SPY has a bad year and you crushed it but your investments are not oversized mega caps) or depression (you thought you were doing pretty good but the SPY had a great year and the mega caps crushed you but again you do not have oversized mega caps), do not use the SPY as a benchmark. Instead choose an Index that more closely matches the assets you are actually holding. It will be useful to do an apples to apples comparison to see how you are really doing against a sensible index. If the sensible index is still kicking your behind, perhaps you need to make a change in your investment approach!

Different Portfolio compositions require a different Index benchmark.

  • If you largely have stocks in the SP500 index, the best ETF to compare yourself against is RSP. In my Large Cap Stalwarts Portfolio I have chosen this benchmark.
  • If you have a mixture of large, mid and small cap stocks, the best ETF to compare yourself against is EQAL. In my Quant Alpha’s Portfolio, I have chosen this benchmark.
  • If you are concentrated in mid cap stocks in your portfolio, the best ETF to compare yourself against is MDY. In my Mid Cap Flyers Portfolio, I have chosen this benchmark.
  • If are concentrated in small cap stocks in your portfolio, the best ETF to compare yourself to is IJR. In my Small Cap Discoveries Portfolio, I have chosen this benchmark.
  • If you have a portfolio that does not really fit into the groups above, you will probably be able to find an Index that is a hybrid of the various weightings. For example, for my BI-Weekly Swings Portfolio, I use BSMAX which is about 1/3 Mid cap and 2/3 Small cap. This matches the distribution of stocks in the Portfolio closely.

Morningstar.com is the source for most of the data above.


Trying to pick individual stocks tends to be a loser’s game. The SPY accurately models the overall stock market. Some of the other indexes mentioned with different allocations to large cap and small cap stocks are fine if they match the asset allocation you’re looking for and have an appropriately low expense ratio.

The most reliable path to wealth is “minimizing the skim” of financial advisor fees, commissions, trading costs and taxes while capturing the full return of the overall market. Just holding the S&P 500 for 30 or 40 years can make you wealthy. Why accept the 90% risk that you’ll underperform the S&P 500 by investing in individual stocks?



You needed to tell me that 30 years ago. (seriously). And you are right. And as I slowly talk to my 12 year old daughter about stuff like this is exactly what I will tell her when she starts working. Its also what I currently tell all fresh college grads who have questions about 401k and investing here at work.


I agree that the most reliable path is minimizing fees and simply investing in the S&P 500.

Investing in random individual stocks does not increase the chance of under-performance. The “90% risk” arises because of investment costs. Paying a financial advisor 1% will increase the chance of under-performance. (There might be other benefits to hiring a financial advisor.)

If investment costs are close to zero, the chance of under-performing is about 50%.

For a portfolio with 40 random S&P 500 stocks and 1.5% investment costs, the chance of under-performing historically was about 84% over 10 years. Over 40 years, the chance of under-performing increased to about 97.5%.

Investing in individual stocks opens up the possibility of mistakes, and the market can be harsh when mistakes are made. Investing in the S&P 500 (market-cap weight) will have the same return as that of the average investor (weighted by dollars invested).


He (@intercst) did! 27 years ago was the first entry in the Retire Early Home Page.


In my opinion, SPY is a fine benchmark. The purpose of a benchmark is to compare your portfolio to the alternative. Investment titans like Warren Buffett and John Bogle recommend simply buying in the index as the simplest and best way for most people to invest. I agree with that assessment. That’s the alternative for most people.

So if you are deviating from the simplest and best way (for most people) to invest, it is entirely reasonable to compare your results to the S&P 500 because that’s what most people should use as an alternative.

Another thing I didn’t like about the article is he suggests you choose a benchmark that most closely resembles your existing portfolio. But your existing portfolio isn’t an alternative to what you are doing, it is what you are doing. You’re essentially trying to use your portfolio as its own benchmark. That makes no sense.


Yes, the 90% underperforms figure was for an actively-managed mutual fund vs. investing in the index.


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The underperform figure for individuals (non-pros) picking individual stocks is probably MUCH higher. Maybe even 98%+.


Well, I certainly agree that investing in an index fund like SPY ETF is a great option for most investors. Most investors should not be picking individual stocks.

But there are many individual investors that are beating the SPY and many that are trying hard every day to do just that. The individual investor can beat the SPY whereas the fund managers cannot. They must move large amounts of money and must be concerned about making the quarterly statement look good. The individual investor can invest in small lots and select smaller companies. This is a huge advantage for the individual investor.

One example of beating the SPY is the owner of this website, The Motley Fool. They have an outstanding record of beating the S&P 500. They post a 497% to 131% advantage over the SPY ETF since 2002 in the Stock Advisor service and a 236% to 111% advantage over the SPF ETF since 2004 in Rule Breakers service. Many investors on this website have substantial portfolios of individual stocks. Many have trounced the SPY ETF by using these services.

Another example is the Saul’s Investing Discussions category. In this category are numerous posters that have handily beaten the SPY over an extended time. We are very lucky to have this robust place where the posters are willing to share their thoughts, details of their portfolio changes and detailed analysis of individual stocks. All this vast amount of information is free! Usually, you have to pay a bit of money to get access to this kind of high quality discourse. If one has not seen this category yet, take a look.

The reason I copied down the blog post to share it, was that I thought since this is such a strong individual stock picking website, many MF Community members will have personal portfolios and like me, compare their results to a benchmark to see how we are doing. We need to use the right benchmark to compare against to track our progress accurately and to make the right investment decisions. Using the mega cap overweighted SPY ETF, is not the right one.


Why not? The article says that your benchmark should look like your portfolio. That makes no literally sense. Your benchmark should be the alternative to your portfolio. Otherwise, there is no point in benchmarking.

For example, let’s say you concluded energy stocks were the place to be, and you use that index as your benchmark. Over the last 15 years, you had a personal CAGR of 4.2% compared to the benchmark of 3.8%. Big win! Unless you look at the whole market which returned 8.8%.

I’ve heard the “don’t use SPY” as a benchmark a number of times in recent years. Advanced by people I suspect aren’t meeting the benchmark.


You can use several benchmarks. SPY should be one of them if investing in US equities.

Investing can be looked at as a decision tree. The base of the tree is a market-cap weight total market fund. For example, if picking small cap growth stocks, you could use 3 benchmarks:
market-cap weight total market fund
small-cap growth

The first decision was investing in US equities.
The second decision was investing in small-caps.
The third decision was investing in growth.

As an example, say you beat VBK by 2% every year:

                       2013  2014  2015  2016  2017  2018  2019  2020  2021  2022  avg  sd
VTI  Large Cap Blend    33    13     0    13    21    -5    31    21    26   -20   13   17
VB   Small Cap Blend    38     8    -4    18    16    -9    27    19    18   -17   11   17
VBK  Small Cap Growth   38     4    -3    11    22    -6    33    35     6   -28   11   21
         example        40     6    -1    13    24    -4    35    37     8   -26   13   21
         VBK - VTI       5    -9    -3    -2     1     0     2    14   -20    -9   -2   9
       example - VTI     7    -7    -1     0     3     2     4    16   -18    -7    0   9

Comparing example to VTI shows how all the decisions worked together.
Comparing example to VBK shows how the individual stock decisions worked.

I agree that using SPY as the only benchmark is not the best method. But SPY should be the first benchmark used. SPY has outperformed in the last 10 years, and that should be taken into consideration. Reversion-to-the-mean often happens.

Rolling returns can be seen at Backtest Portfolio Asset Allocation

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