When trying to understand how a portfolio has performed, many people will look to an index as a benchmark. The S&P 500 is the most common and well-known index used for comparison. This index is made up of the 500 largest publicly-traded companies in the US. Join us as we walk you through some of the reasons that a Camber portfolio generates different returns than the S&P 500.
For this article, we have outlined a comparison of a Camber model equity portfolio to some well-known Exchange Traded Funds (ETFs). The five funds we have included are:
The most important reason that our portfolios differ from the S&P 500 index is due to diversification. Diversification is a risk management technique that blends several different investments within a portfolio. Camber’s portfolios contain all 500 stocks that you would find in the S&P 500 index in addition to about 9,500 other stocks from around the world. We construct portfolios in a way that aligns with long-term thinking and academic research. The goal of this approach is to consistently deliver strong and reliable returns.
If you look at diversification through a 1-year lens, you will always be disappointed because diversification removes your exposure to the extremes of the distribution curve. Great investing is not achieved by chasing 1-year extreme positive returns. Great investing is achieved by compounding normal returns year-over-year and avoiding extreme negative returns. A single year of extreme negative returns can be detrimental to your lifetime rate of return.
The difference in returns you see over a one-year period is related to the different exposures to countries, industries, and individual companies that each portfolio has. Even the total amount you pay in fees will directly contribute to the overall returns. Below you will see the effect of diversification on the five funds we have selected.
Although each of these portfolios are similar in concept you can see the subtle difference in each component they are made up of. From the value that each stock represents within the top 20 holdings to how much of the total portfolio the top 20 holdings represent, each difference directly contributes to the total return the portfolio will generate.
We hope that you liked this article. We also hope that you understand a little more about how diversification works and why your returns can be different from the S&P 500.