Throughout most of my career, the S&P 500 has been an appropriate bogey to assess manager performance.

More than that, it's the most widely used benchmark in the capital markets.

But today, it doesn't represent the broad-based, diversified exposure to the

U.S. economy that most participants take for granted when investing passively or measuring

manager skill. This, what Ted's thinking, considers the evidence, implications, and challenges

posed by the current composition of the S&P 500.

When the benchmark becomes a bet.

Beating the S&P 500 is hard.

The case for index funds seems more compelling than ever, and market share continues to rise.

I often hear allocators discuss their preference for passive management in public

markets and active management in private markets. It's become conventional wisdom that Alpha

has disappeared from public markets. But there's a problem. The S&P 500 no longer behaves like a

neutral benchmark. Today, it represents a concentrated exposure

to a small number of companies. Investors who think they're buying diversified exposure

to the U.S. economy are instead getting a concentrated bet on a handful of technology companies

tied closely to the success of AI. Most investors understand this. Few know what to do about it.

Governance structures make it difficult to shift focus away from the S&P as the benchmark for essentially

every definition of alpha. Deviating from the index introduces career risk, even if sticking with it proves suboptimal.

This tension sits at the heart of portfolio construction. It's worth revisiting the case for

index funds to highlight this dilemma. The data increasingly indicates that active management

is a loser's game. When Charlie Ellis wrote

winning the losers game in 1987, only 15% of actively managed funds outperform the market.

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