S&P 500 vs. Faculty Endowments: The Outcomes Are In

Schools throughout the nation maintain billions of {dollars} in endowment funds, investing in all the pieces from personal fairness to hedge funds. These establishments have entry to elite monetary managers and unique funding alternatives, but 12 months after 12 months, they path behind fundamental index funds just like the S&P 500 and NASDAQ 100.

Over the past decade, faculty endowments have returned simply 67% of the S&P 500’s efficiency and 37% of the NASDAQ 100’s progress. Which means if they’d merely invested in an S&P 500 index fund, their belongings could be almost 50% bigger right now. If they’d adopted the NASDAQ 100, their portfolios would have greater than doubled.

Regardless of this constant underperformance, endowment managers justify their methods by citing danger administration. Nevertheless, their asset allocations don’t help that argument. With most holding solely 10% in mounted revenue investments, these portfolios already carry substantial danger. So why are faculties sticking with funding methods that go away billions on the desk?

Given this comparatively high-risk combine, faculties might considerably improve their funding returns — with out growing danger — by shifting a better portion of their endowments into low-cost, broad-based index funds and exchange-traded funds (ETFs). By doing so, they would scale back administration charges, improve diversification, and seize extra of the market’s long-term progress. It might additionally liberate more cash for scholar monetary assist and campus enhancements.

Faculty Endowment Efficiency

This chart compares the typical annual return on funding for school endowments with the S&P 500 since 2011. The information is introduced on a fiscal 12 months foundation working from July 1 to June 30. 

The S&P 500, which tracks the five hundred largest U.S. corporations, is well accessible to buyers by means of ETFs comparable to Vanguard VOO, State Avenue SPY, and iShares IVV. 

As this chart reveals, the S&P 500 had a better return on funding than faculty endowments in yearly besides one. The funding returns are earlier than subtracting the charges that faculties pay to their funding managers, so the precise hole in returns is even wider. 

The common annual return on funding was 8.3% for school endowments, in contrast with 13.3% for the S&P 500. 

On common, faculty endowments goal a 7.5% price of return on funding. This price of return is designed partly as a hedge towards inflation and partly based mostly on spending necessities and funding administration charges.

Even a really conservative funding combine, with two-thirds invested within the S&P 500 and one-third in money, would have outperformed the typical faculty endowment. 

To make it clearer, this chart reveals simply the distinction between the typical price of return on funding for school endowments and the S&P 500. On common, the S&P 500 beat faculty endowments by 5.1% from 2011 to 2024. 

Cumulative Returns: Endowments vs. Market Indexes

Lengthy-term cumulative returns enlarge the distinction between actively managed faculty endowments and passive index funds.

This chart reveals the typical cumulative return on funding for school endowments and the S&P 500 since 2011. Though faculty endowments demonstrated a powerful 188% cumulative acquire, the S&P 500 greater than doubled this, with a 431% cumulative acquire on funding. Each, nevertheless, are dramatically shadowed by the 1021% cumulative acquire from investments within the NASDAQ 100. 

These figures illustrate the dramatic efficiency hole between faculty endowments and passive funding methods.

The Case For Investing In Know-how Shares

Schools might considerably enhance their efficiency past the S&P 500 by investing in expertise  shares. 

The NASDAQ 100, which tracks the highest 100 corporations within the NASDAQ and is out there by means of the Invesco QQQ ETF, has persistently outpaced the S&P 500. 

This index is tech-heavy, with its prime holdings together with the so-called Magnificent Seven:

• Alphabet (Google)
• Amazon
• Apple
• Meta (Fb)
• Microsoft
• NVIDIA 
• Tesla

Collectively, these corporations signify greater than 40% of the holdings of the NASDAQ 100 by market capitalization. 

Since 2011, the NASDAQ 100 has delivered a mean annual return of 20.1%, greater than double the typical return on funding of faculty endowments. 

Endowment Tax

The most important faculty endowments pay an excise tax on their internet funding returns, lowering the funds out there for scholar monetary assist and different faculty priorities. 

The Tax Cuts and Jobs Act of 2017 launched a 1.4% excise tax on the web funding revenue of faculty endowments. This tax applies to non-public faculties and universities with no less than 500 college students and endowment belongings of no less than $500,000 per full-time-equivalent scholar. [26 USC 4968] Public faculties are exempt from this tax.

A number of legislative proposals have sought to extend the tax price greater than tenfold. For instance, Rep. Mike Lawler (R-NY-17) launched the Endowment Accountability Act [HR 118-9213] to extend the endowment tax to 10% and scale back the per-student threshold to $200,000. Rep. Troy E. Nehls (R-TX-22) launched the Endowment Tax Equity Act [HR 119- 446] to extend the endowment tax price to 21%. The current menu of funds reconciliation proposals would enhance the endowment tax to 14%. 

The endowment tax will not be lowered if a university will increase the quantity of scholar monetary assist or gives a selected quantity of monetary assist to its college students. 

Faculty Endowment Spending Insurance policies

In keeping with a 2023 Congressional Analysis Service (CRS) report, Faculty and College Endowments: Payout Charges and Spending on Scholar Monetary Support (IN12126), faculties sometimes goal a 4.5% endowment spending price, with a excessive of 4.8% in 2021. That is decrease than the 5.0% spending requirement for personal foundations.

Practically half of all endowment spending helps scholar monetary assist.

Conclusion

Regardless of getting access to elite funding alternatives, faculty endowments considerably underperform passive index funds. By lowering administration charges and reallocating towards low-cost ETFs, faculties might dramatically enhance their returns whereas sustaining danger ranges akin to their present portfolios.

The information suggests a compelling takeaway: generally, the very best funding technique is the best one.