Beating the Market (One of the way)

When people saying beat the market, the market usually refer to the S&P500 and it is really not difficult to beat S&P500. If you just apply some simple logic thinking and without actively picking stocks you can still beat the market. However, to beat the market first we have to be able to accept more volatility in our portfolio.

We need to understand the S&P500 is make up of 500 companies which is divided into sectors and under different sector it is sub-divided into industiries. As the ETF get more specialised, the amount of holdings in it reduces and in turn increases the volatility.

Sectors in the S&P500

The S&P is divided into 11 sectors. Every sectors will perform differently compared to the S&P. The objective is to identify which sectors will outperform the market over the long term.

When plotted the charts together with SPY. There are 4 main sectors that will outperform the market over the long term. Technology (XLK), Consumer Cyclical (XLY), Healthcare (XLV) and Communication services (XLC). All other sectors, will underperform.

Industries ETFs

We can take one step further by looking at the performance of the industry under individual Sector. For this case, we should take Healthcare Sector (XLV) as an example.

We can go to ETF database and see the industry avaliable for healthcare.

Basically is sub-divided into pharmaceutical, medical device, Healtcare service, Biotechnology

https://etfdb.com/etfs/sector/healthcare/#etfs&sort_name=join_table:industry&sort_order=desc&page=1

Then we repeat the process again plotting on the yahoo chart. Basically Biotechnology and medical device will out perform its Sector ETF over long term.

Picking the Top Holdings?

Theoritically, by picking the top holdings of the ETFs, you will outperform the ETFs because the fund is weighted is by market capitalisation. However, sometime may not be the case. There is also a risk that the top holdings ETF, typically the industries ETFs level, changes quite frequently, it will be quite difficult for retail investors to monitor continuously and react accordingly. Thus, it is best to stop at the industries ETFs level, if you are a passive investor.

However, if you still insists, it is better to select the Top holdings from a very broad based index ETFs. As the top holdings seldom changes for these ETF and most of these companies have great moat and very strong fundamental. To beat S&P500, you may want to select companies in the technology, customer cyclical, communication or healthcare sectors.

Conclusion

Investing is about achieving your financial goal. To beat the market or not is actually not important to me, of course will be a bonus if it did. What is more important for me is when market crashes during my retirement time. i will still be able to live off my investment and never run out of money.