Stock Market’s Unprecedented Rally: Two ETFs Outperforming the S&P 500

The stock market is experiencing a remarkable surge, with the S&P 500 poised to achieve **back-to-back annual gains exceeding 20%** – a feat rarely seen in the last century. This unusual market behavior has presented an opportunity for savvy investors, as demonstrated by the exceptional performance of two actively managed exchange-traded funds (ETFs): the JPMorgan U.S. Research Enhanced Index Equity ETF (JREU) and the Gotham Enhanced 500 ETF (GSPY). While the broader market celebrates its impressive growth, these ETFs have not only kept pace but have consistently outperformed the benchmark, capturing the attention of investors seeking superior returns.

Key Takeaways:

• Unprecedented Growth: The S&P 500 is on track for consecutive years of growth exceeding 20%, a rare occurrence in modern market history.
• ETF Outperformance: Two ETFs, JREU and GSPY, have consistently outperformed the S&P 500, showcasing the potential of active management within an index-tracking framework.
• Strategic Approaches: JREU employs “research-enhanced indexing,” making numerous small adjustments, while GSPY reweights the S&P 500 components based on perceived valuation.
• Accessibility: JREU is primarily available to European investors, while GSPY is readily accessible to U.S. investors.
• Investment Implications: The success of these ETFs highlights the evolving landscape of investment strategies and the potential for active management to enhance returns even in a robust market.

The S&P 500’s Remarkable Run

The current market rally is nothing short of extraordinary. The S&P 500’s **24.73% increase in 2024**, closely following a **24.23% rise in 2023**, represents a historical anomaly. According to Deutsche Bank, this marks only the third instance of such consecutive, substantial gains in the past century. This sustained upward trajectory, however, hasn’t benefited all investors equally. While the overall market experiences this growth, the ability to identify and capitalize on opportunities within this environment demonstrates significant financial acumen.

Understanding the Market’s Unexpected Behavior

Several factors likely contribute to this unusual market strength. These could include sustained economic growth, technological advancements, favorable regulatory environments, and investor sentiment. It’s important to note that such extended periods of upward momentum are not sustainable indefinitely. Market corrections and periods of volatility are inevitable components of any investment strategy. Investors should make their decisions based on their individual goals, risk tolerance, and a long-term vision for their portfolio.

JPMorgan U.S. Research Enhanced Index Equity ETF (JREU): A Consistent Outperformer

The London-listed JREU, managed by JPMorgan Asset Management, stands out with its exceptional track record. It hasn’t just outperformed the S&P 500 in 2023 and 2024; it has **consistently exceeded the benchmark every year since 2019**. This remarkable performance is attributed to its unique approach known as **”research-enhanced indexing” (REI)**. This strategy cleverly blends traditional index investing with the finesse of active management.

The Power of Research-Enhanced Indexing

Instead of making a few significant bets, JREU employs a strategy of numerous, smaller adjustments to its holdings. As co-fund manager Piera Elisa Grassi previously explained to CNBC, **”the fund makes numerous small bets rather than a few large ones.”** This allows the fund to closely mirror its benchmark’s overall composition while subtly tweaking its holdings to capture excess returns. The result is a superior return to the overall index, despite the core positions aligning very closely with the index.

JREU’s Accessibility and Implications

JREU’s success is particularly noteworthy given its accessibility primarily to European investors. This showcases the global nature of investment opportunities and the fact that superior returns are not restricted to specific geographical locations. The fund’s consistent outperformance underscores the potential of innovative investment strategies to deliver returns that exceed traditional market benchmarks. It highlights the value of active management techniques applied within a tightly managed framework.

Gotham Enhanced 500 ETF (GSPY): A Newer Contender, but Equally Impressive

The U.S.-listed GSPY, managed by Gotham ETFs, offers a compelling counterpoint. While newer, having launched in 2021, it boasts an equally impressive record of **outperforming the S&P 500 every year since its inception**. Gotham ETFs’ strategy is straightforward yet effective: they **”buy all 500 stocks in the S&P 500 Index but reweight them, buying more of the ones we think are cheaper and less of the ones we believe are more expensive.”** This targeted approach capitalizes on perceived market inefficiencies and reflects a belief in active management as a powerful tool to yield superior results.

GSPY’s Transparency and U.S. Investor Access

GSPY stands out for its transparency and broad accessibility to U.S. investors. Listed on the New York Stock Exchange, it’s readily available through the majority of brokerage firms. Such transparency and ease of access are attractive factors to investors seeking both superior returns and convenience. The fact that this fund has consistently outperformed the S&P 500 in such a short period highlights the potential of reweighted indexing and active valuation strategies.

Implications for Investors

The exceptional performance of JREU and GSPY offers valuable insights for investors. It underscores that even in a robust bull market, active management strategies can significantly enhance returns. The success of these ETFs highlights the importance of **diversification**, as demonstrated by the different strategy that has each yielded above average returns. While index funds remain valuable, actively managed strategies with a clear focus can significantly improve investor returns. However, it’s vital to remember that past performance doesn’t guarantee future success. Investors should conduct thorough research and align their investment decisions with their individual risk tolerance and financial goals.

The remarkable performance of the S&P 500 and the superior returns offered by these ETFs highlight the dynamic nature of the stock market. It’s a reminder that while market trends offer opportunities, actively managed funds capable of exploiting market inefficiencies can potentially yield better results. For those who want to pursue returns above the norm, it’s worth examining funds that offer a more active approach to portfolio management.