5 ETFs That Could Outperform the S&P 500 in the Next 5 Years

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Even professional investors have a hard time beating the returns of the S&P 500, especially on a consistent basis. And while certain stocks will by definition top the average return of the 500 stocks in the index, certain exchange-traded funds (ETFs) may offer an even better opportunity for investors.

While no one can predict future market movements, there are a handful of ETFs that seem poised for outperformance. Quality fundamentals, momentum and sector rotation are just a few of the reasons why these ETFs may offer good relative performance over the next five years. Just remember to do your own due diligence before buying any of these ETFs, ensuring that they match your investment objectives and risk tolerance. 

VanEck Semiconductor ETF (SMH)

• AUM/net assets: $31.55 billion
• Dividend yield: 0.33%
• One-year performance: 39.61%
• Expense ratio: 0.35%
• Sector/style: Technology/semiconductors
• Why it might beat the S&P 500: As evidenced by the ETF’s strong one-year performance, semiconductors are currently in favor. With the artificial intelligence (AI) tailwind the market is experiencing, many analysts see the sector having room to run. 
• Risks: Cyclical; heavy concentration (top-10 holdings represent more than 75% of the entire ETF; top holding Nvidia comprises almost 19%; non-diversified ETF)

iShares MSCI USA Momentum Factor ETF (MTUM)

• AUM/net assets: $19.38 billion
• Dividend yield: 0.92%
• One-year performance: 15.66%
• Expense ratio: 0.15%
• Sector/style: U.S. large- and mid-cap stocks with recent high price momentum
• Why it might beat the S&P 500: In recent history, the performance of the overall S&P 500 has been dominated by a select handful of stocks; if market leaders continue to exhibit momentum, MTUM should outperform.
• Risks: Momentum investing, by its very nature, is susceptible to profit taking, market shifts and high volatility.

Invesco S&P 500® Quality ETF (SPHQ)

• AUM/net assets: $15.04 billion
• Dividend yield: 1.07%
• One-year performance: 7.74%
• Expense ratio: 0.15%
• Sector/style: U.S. large-cap stocks with strong fundamentals, low leverage and consistent returns on equity
• Why it might beat the S&P 500: The market has been led by high-growth stocks in recent years; if market breadth widens, or investors begin to reward companies with more consistent revenue streams, SPHQ will fall into favor.
• Risks: Growth stocks have shown little sign of weakening; so-called “quality” stocks, with their defensive, low-growth nature, may not draw investor dollars unless a major market rotation occurs.

iShares Semiconductor ETF (SOXX)

• AUM/net assets: $14.73 billion
• Dividend yield: 0.61%
• One-year performance: 29.70%
• Expense ratio: 0.34%
• Sector/style: Technology/semiconductors
• Why it might beat the S&P 500: Like SMH, SOXX is tied to the performance of cloud, edge computing and AI stocks, resulting in large one-year gains; if the sector remains in favor, SOXX will benefit. One important difference between the two ETFs is that SOXX is slightly more diversified, with the top-10 holdings only comprising about 60.5% of the fund. Top holding AMD has a weighting of about 10%.
• Risks: As with its competitor, SOXX carries the risks of high volatility and sector concentration; if semis fall out of favor, the ETF could suffer losses.

Vanguard Information Technology ETF (VGT)

• AUM/net assets: $128.38 billion
• Dividend yield: 0.41%
• One-year performance: 21.25%
• Expense ratio: 0.09%
• Sector/style: Broad-based technology fund owning small-, mid- and large-cap companies in three primary industries: technology software and services, technology hardware and equipment, and semiconductor and semiconductor equipment manufacturers
• Why it might beat the S&P 500: Lower-cost, broader-based technology fund that can capture gains from a wider net of industries across all market capitalizations; if tech remains hot, it’s likely that at least a portion of the ETF will significantly outperform
• Risks: Although more diversified than some of the ETFs on this list, VGT is still heavily weighted in tech. A turndown in the sector could lead to volatility and big losses.

The Bottom Line

You can’t outperform the S&P 500 without adopting a strategy that varies from the market average. One way to achieve this is to own a concentrated portfolio, as most of the above ETFs do. But you’re also courting more risk with this strategy. The sole diversified entry in this list, SPHQ, still focuses on a specific sector of the market, and that strategy is not without its risks either.

The bottom line is that most advisors would suggest you use these ETFs as ancillary or satellite positions in your portfolio, rather than your core position. But if your risk profile aligns with some of these high-flyers, they may help you outperform the S&P 500. Just understand that the chance for higher returns comes with the risk of greater losses as well.

Editor’s note: All financial statistics were sourced from Yahoo Finance.

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