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Why Relying Solely on the S&P 500 May Leave Money on the Table
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Published in Stocks and Investing on Tuesday, November 25th 2025 at 18:08 GMT by MarketWatch- 🞛 This publication is a summary or evaluation of another publication
- 🞛 This publication contains editorial commentary or bias from the source
Spice Up Your Portfolio: Why Your Love for Index Funds Should Expand Beyond the S&P 500
For many investors, the S&P 500 has long been the go‑to “one‑size‑fits‑all” vehicle for gaining broad exposure to the U.S. equity market. It’s low‑cost, highly liquid, and has historically delivered solid long‑term returns. But as the MarketWatch article “Love Your Stock Index Fund, It Might Be Time to Spice Up Your Investment Strategy” argues, sticking exclusively to a single index fund may be leaving money on the table. In the decade‑long journey of portfolio management, the rules are shifting, and savvy investors are beginning to mix in a variety of complementary strategies that add depth, reduce risk, and potentially boost after‑tax performance.
1. The Foundations of Index Investing
The article starts by acknowledging the compelling advantages of passive index investing: low expense ratios, automatic diversification, and a track record of beating many actively managed funds after fees. It references data from Morningstar and the S&P 500’s 30‑year total return of roughly 10% per annum as proof of the model’s resilience. The author also notes that index funds are especially useful for long‑term, “set‑and‑forget” investors who rely on compounding rather than market timing.
Yet the piece emphasizes that a portfolio built on one index may still be overexposed to certain sectors. The S&P 500 contains heavyweights like Apple, Microsoft, and Amazon that drive the index’s performance. If these companies underperform, the entire portfolio can suffer, even though the fund is “diversified” on paper.
2. Broadening the Horizon: Sector‑Focused Indexes
The article’s first suggestion for “spicing up” is to allocate a portion of the portfolio to sector‑specific index funds. It cites Vanguard’s S&P 500 Equal Weight Consumer Discretionary ETF (RCD) and the iShares MSCI USA Small‑Cap Value ETF (SVAL) as examples of ways to capture upside in parts of the market that the traditional S&P 500 underrepresents.
Key takeaways include:
- Equal‑weight indexes give smaller companies more influence, potentially leading to higher growth in the next decade.
- Thematic funds—such as those focused on cybersecurity, renewable energy, or healthcare innovation—can outperform broad indices during periods of rapid technological change.
- The author warns that these sector funds carry higher volatility and higher correlation with specific risks, so they should occupy a smaller slice of a balanced portfolio (often 10–20%).
3. Going Global: International and Emerging Market Indexes
Another recommendation is to add international exposure. The article references the MSCI EAFE Index, which tracks developed markets outside North America, and the MSCI Emerging Markets Index. It argues that:
- Diversifying outside the U.S. mitigates domestic economic downturns.
- Emerging markets, while riskier, historically offer higher growth potential due to younger demographics and expanding middle classes.
- Currency risk is an intrinsic part of international investing, and the article suggests using hedged ETFs (e.g., iShares MSCI Emerging Markets Hedged USD Index ETF) if the investor is sensitive to exchange‑rate swings.
The piece highlights that investors often neglect the “home bias”—the tendency to overinvest in their own country—leading to sub‑optimal risk‑adjusted returns.
4. Adding Fixed Income: Bond Index Funds and Inflation Protection
The author argues that even the most passive investors would benefit from a bond component. A typical rule of thumb is the “120‑minus‑age” guideline, which suggests the bond allocation be roughly 120 minus the investor’s age. The article presents Vanguard’s Total Bond Market Index Fund (BND) as a low‑cost, broadly diversified bond option and points out that bonds tend to provide counter‑cyclical stability during equity downturns.
The article also discusses inflation‑protected bonds (TIPS) and how adding them can shield purchasing power during periods of rising inflation—a concern that has resurfaced with the current post‑COVID‑19 monetary environment.
5. Tactical Additions: Factor Investing and Active Management
Beyond simply diversifying across asset classes, the article introduces factor investing—the idea of tilting a portfolio toward specific characteristics like value, momentum, low volatility, or quality. It cites research from the CFA Institute and Vanguard’s “Factor Investing” series to demonstrate that these tilts can generate incremental alpha with a modest impact on volatility.
The author also points out that small‑cap and mid‑cap indexes often outperform large‑cap indexes over longer horizons, but they also come with higher volatility. Thus, a balanced mix of large‑cap and small‑cap indexes can improve a portfolio’s risk‑adjusted returns.
For investors who feel confident in their research, the article mentions active ETF managers who use fundamental analysis to pick undervalued stocks within an index‑like framework. However, it cautions that active management should only occupy a small portion of the portfolio due to higher fees and the difficulty of consistently beating the market.
6. Tax Considerations and the “Spice” Strategy
The article stresses that any new allocation should also factor in tax implications. For example, adding an international index fund that generates high dividends might create a larger tax bill in a taxable account. The solution: house the tax‑heavy components in a tax‑advantaged vehicle like an IRA or Roth IRA.
Moreover, the piece reminds readers that index fund turnover is low, which reduces capital gains distributions. A tactical shift to a more active or sector‑specific fund could increase turnover, so investors should assess whether the potential upside outweighs the additional tax costs.
7. Putting It All Together: A Practical Example
To ground the advice, the article proposes a sample portfolio for a 35‑year‑old investor:
| Asset Class | Current Allocation | Suggested Addition |
|---|---|---|
| U.S. Large‑Cap Index | 35% | - |
| U.S. Small‑Cap Value Index | 10% | +5% |
| International Developed Markets | 5% | +5% |
| Emerging Markets | 3% | +2% |
| U.S. Bonds | 25% | +5% |
| Inflation‑Protected Bonds | 5% | +2% |
| Thematic (e.g., Clean Energy) | 5% | +5% |
| Cash / Money Market | 7% | - |
This would shift the overall allocation to 35% large‑cap, 15% small‑cap, 12% international (7% developed + 5% emerging), 30% bonds (including 7% inflation‑protected), 5% thematic, and 3% cash. The article stresses that investors can adjust the numbers to match risk tolerance and time horizon, but the key is the inclusion of multiple dimensions beyond the single index.
8. Bottom Line
The MarketWatch article ultimately reminds investors that the passive “index fund only” strategy is not a one‑size‑fits‑all solution for every scenario. While the S&P 500 provides a solid core, a portfolio can be “spiced up” with:
- Sector and thematic ETFs for growth
- International and emerging‑market exposure for diversification
- Fixed‑income and inflation‑protected bonds for stability
- Factor tilts for enhanced risk‑adjusted returns
By consciously adding these layers, investors can potentially improve their long‑term outcomes without dramatically increasing complexity or costs. The key is to stay disciplined, keep fees low, and periodically rebalance to maintain the intended asset allocation. In the end, a well‑structured, diversified passive portfolio might just be the smartest “spice” you can add to your investment strategy.
Read the Full MarketWatch Article at:
[ https://www.marketwatch.com/story/love-your-stock-index-fund-it-might-be-time-to-spice-up-your-investment-strategy-dd926378 ]
