What’s getting ahead of the S&P 500?

US equities has been the main market to try and beat over the past decade, and some funds and themes have managed to do so, consistently.

Past performance is no guarantee of future returns, but it can be worth paying attention to what has outperformed through the recent AI-rally, Iran war and long-term volatility.

AJ Bell analysed the major equity indices as well as active and tracker funds against the S&P 500’s total return over one, three, five and 10 years as well as year-to-date to see which ones had been able to outperform, or at least match, the index.

While it’s not a global benchmark, the S&P 500 is the main US market, and its members have driven the majority of global equity returns over this time frame.

Research by the London Stock Exchange Group in 2024 calculated that the US has contributed around 181% of the near 216% total global equity return (in UD) during the preceding 16 years.

Overall, 73 funds - 16 of them active - and seven trusts beat the benchmark. In the analysis, two themes appeared: emerging markets, especially the South Korean exposure, and US tech itself.

Outperforming indicies

The only other equity benchmarks keeping up with the S&P 500 were the tech-focussed US Nasdaq 100 and the major emerging market (EM) indices: MSCI EM and MSCI EM 50. Korea’s primary benchmark, the KOPSI, has beaten the S&P 500 over every time frame bar 10-years, where it’s almost 10% behind.

The recent surge of returns in emerging markets and South Korea itself is mainly down to just two stocks; Samsung and SK Hynix.

These two memory chip manufacturers make up almost 70% of the KOPSI index, an even greater concentration issue than the US , and made 100-200% returns so far this year.

They’ve both made more profits this year alone versus the past 30 years, mainly on the back of investor’s AI-bullishness.

This has significantly impacted the near and long-term averages of Korean dedicated or heavily allocated portfolios with a flurry of Korean ETFs and active EM funds making it onto the list, including the Barings Korea, the HSBC MSCI Korea Capped ETF, iShares MSCI Korea and the Xtrackers MSCI Korea ETF.

While the market has been successful, it’s also been volatile as investors figure out how sticky the Korea-AI story is long term. Samsung and SK Hynix showed they were not immune to AI –overpricing jitters, even with a 19-fold jump in Q2 operating profit from Samsung as their share prices dropped over 10% in a single day.

This doesn’t mean that South Korea doesn't have legs to hold up over the long-term going forwards, more that this is a new entrant to a very competitive race.

The Franklin Templeton Emerging Markets Investment Trust (TEMIT) is one of the largest and oldest closed-ended EM portfolios and featured in the study.

It has almost 30% in South Korea followed by Taiwan and managers Chetan Sehgal and Andrew Ness explained how the AI drive had become infused with this equity story.

In latest annual results they said “some of the best performing emerging markets for this period were the technology-heavy markets of South Korea and Taiwan, where market expectations of returns from expenditure on AI had a major part to play”.

They remain overweight the market and through not only the chip makers but also the ‘green transition’ theme, next-generation mobility and robotics (Hyundai Motor) and the country's dominant internet search platform integrating e-commerce, payments and digital content (NAVER).

US tech  

Given US stocks have been the major drivers of equity returns for so long, it makes sense for portfolios heavily invested in them to have also done well, in particular those in technology stocks.

Tech has been the main theme affiliated with the US for several decades, having produced the internet-era leaders and is now competing to repeat that dominance in the AI race.

Janus Henderson Global Technology Leaders and Liontrust Global Technology were two active funds besting the S&P 500, along with the passive L&G Global Technology Index Trust and iShares S&P 500 Information Technology Sector ETF.

Polar Capital Technology Trust, run by Nick Evans and Ben Rogoff, have taken a strong but selective view on US tech, holding most but not all of the Magnificent Seven and moving away from them into more AI-linked names once they saw that cycle start to appear.

Current market sentiment towards the US is somewhat nuanced, at least in conversation. Debates around the sustainability of the big-tech AI spend, a year on from the ‘end of US exceptionalism’ chatter caused by Liberation Day has caused active money to move away from the US.

But US stocks have continued to deliver a high level of returns so investors aren’t turning away from it entirely, just taking a more selective approach.