Most stock mutual funds, especially those that are actively managed, aim to beat one benchmark — the S&P 500 index.
However, the fundamental reason index funds were invented in the first place is because many of those actively managed mutual funds don’t beat the S&P 500 in the long run. Still, there are a few funds that can beat the bogey in the long run.
Although index funds can make smart investment choices, they’re only designed to track the performance of an index, less the expenses to operate the fund.
Of course past performance is no guarantee of future results, but there are a handful of mutual funds that have beaten the S&P 500 in the past and there is a reasonable expectation that they can repeat that performance in the future.
So without further ado, here are three mutual funds in different categories that can perform better than the S&P 500 over time:
Mutual Funds That Can Beat the S&P 500: Vanguard Mid Cap Index Fund (VIMSX)
Expenses: 0.2%, or $20 per $10,000 invested annually
Minimum Initial Investment: $3,000
One way to beat the S&P 500 is to buy a fund with low expenses that tracks a mid-cap index, and one of the best mutual funds to do this is Vanguard Mid Cap Index Fund (MUTF:VIMSX).
Mid-cap stocks as a collective whole have been said to be the “sweet spot” of the total stock market because they tend to outperform the S&P 500 index in the long run but don’t carry as much market risk as small-cap stocks.
VIMSX tracks the CRSP US Mid Cap Index, which recently represented about 340 holdings like Equinix Inc (NASDAQ:EQIX), Fiserv Inc (NASDAQ:FISV) and Fidelity National Information Services Inc (NYSE:FIS).
For example of its historic out-performance, the 10-year annualized return for VIMSX is 8.6%, whereas the S&P 500 has a return of 7.9%.
Mutual Funds That Can Beat the S&P 500: Fidelity Select Software & IT Services Portfolio (FSCSX)
Minimum Initial Investment: $2,500
Another good way to beat the S&P 500 index is to invest in a sector that has strong long-term potential for market leading performance and Fidelity Select Software & IT Services Portfolio (MUTF:FSCSX) is one of best mutual funds to do the job.
Although technology can have periods of underperformance compared to the broader market, the long-term performance for technology has trended much better than the S&P 500. The 10-year return of 14.8% for FSCSX crushes that of the S&P 500 at 7.9%.
For a bit of perspective, think of some of the biggest companies in the world today and many are tech firms.
For example FSCSX holdings like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), either didn’t exist or were not publicly traded 15 years ago. These companies can be the large, mature leaders of the future, such as Microsoft Corporation (NASDAQ:MSFT), while other technologies that we can’t imagine yet are sure to be the big growth stories of tomorrow.
3 Mutual Funds That Can Beat the S&P 500: T. Rowe Price Health Sciences (PRHSX)
Another sector that shows promise of beating the S&P 500 in the future is healthcare and T. Rowe Price Health Sciences (MUTF:PRHSX) is one of the best mutual funds to capture that potential.
Although like many health sector funds, PRHSX has taken an recent hit in performance from a big dip in biotechnology stocks, the same strengths that made this five-star fund one of the 10 best mutual funds of the past 10 years look to keep the fund a market-beater going forward.
With an aging U.S. population and with more support from advances in health products, services and devices, PRHSX’s top holdings like Aetna Inc (NYSE:AET), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) and Allergan plc (NYSE:AGN), can enjoy performance that beats the S&P 500 over the next decade and beyond.
One other caveat to PRHSX is that the fund has a new manager, Ziad Bakri. However, Bakri has been on the healthcare research team with T. Rowe Price for five years. Also PRHSX has changed managers in the past 10 years and the performance during that time still beats 99% of health sector funds during that time frame.
In summary, to beat the S&P 500 index, investors should have a long-term outlook and therefore must be willing to see short-term periods of under-performance.
Note: PRHSX is closed to new investors as of this writing. An outstanding and comparable alternative that is open to new investors is Fidelity Select Healthcare (MUTF:FSPHX).
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds PRHSX, in some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, South Carolina. Under no circumstances does this information represent a recommendation to buy or sell securities.