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In general, investments carrying more risk and volatility provide higher expected returns than those with lower risk and volatility. A 1-year T-note will provide a guaranteed return of 2.6%, slightly higher than inflation. Meanwhile, a share of a S&P 500 ETF will provide about 7.1% return, though with a standard deviation of close to 20 percentage points.

Given a long enough time horizon, the ETF will always beat out the T-note. But are there other investments that carry higher expected values than stocks or stock-based ETFs, presumably with higher risk?

I'm not interested in taking out loans, buying on margin, or buying high-fee leveraged stocks/ETFs.

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  • Are low fee leveraged ETFs acceptable? What do you consider "high fees"?
    – Ben Voigt
    Jan 19, 2019 at 23:38
  • Downvoters please provide feedback.
    – MooseBoys
    Jan 20, 2019 at 1:57
  • @BenVoigt No hard cutoff, but I usually try to avoid actively managed funds, which seem to carry a 1%ish or more expense ratio. I prefer 0.1% or lower.
    – MooseBoys
    Jan 20, 2019 at 2:02
  • Ok, because for example SPUU comes in at 0.67% ER.
    – Ben Voigt
    Jan 20, 2019 at 2:08

2 Answers 2

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An un-diversified portfolio has the potential to outperform the S&P 500.

The portfolio could be stocks that seem to have particularly good prospects or the portfolio could simply be stocks, bonds, currencies, and commodities that are currently out-of-favor. Or the portfolio could be short-term momentum positions. In any case leverage is not necessary but mortgage-REIT's are one example of companies that use leverage and hedging.

The S&P 500 is a type of long-term momentum fund that increases the holding of companies as they get larger and decreases the holdings of companies as they get smaller. The S&P 500 has worked very well in recent years as one pull-back from a market-top after the year 2000 re-balanced and recovered to make another market-top in the year 2007. However, the recent year market-top largely represents government support of the financial markets. I suppose that the S&P 500 will effectively re-balance in this situation as well.

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  • In addition, worth mentioning the different possibilities between small and large companies. The S&P is full of companies that grew by a factor of 40 --- but they didn't make it into the club until after the big payout.
    – Ben Voigt
    Jan 20, 2019 at 2:00
  • Your suggestion seems to be simply picking stocks, right? While this potentially could beat the market, it could also lose to the market. In fact, I'd posit that the expected return (if stocks are picked from the S&P 500) would be exactly 7.1%, but with a higher standard deviation.
    – MooseBoys
    Jan 20, 2019 at 2:01
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    @MooseBoys: The key to get higher return (and risk) is don't pick large-cap. DJIA members (the "DOW 30") especially are dinosaurs, big and unwieldy, and even gigantic profits are small compared to their size. S&P are only large-cap, not mega, but the same holds true. Compare to the S&P 600 (no, that's not 500 mistyped).
    – Ben Voigt
    Jan 20, 2019 at 2:15
  • I suggested picking liquid assets including stocks. I assume the portfolio would have somewhere between five and twenty-five positions.
    – S Spring
    Jan 20, 2019 at 5:13
  • @BenVoigt Is there any equivalent index that's been around longer? It's difficult to draw reliable conclusions when the S&P 600 has been around less than two decades.
    – MooseBoys
    Jan 20, 2019 at 5:21
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If you're not worried about expected return values and you're looking for more risk, you could try roulette.

Perhaps more in line with your expectations in this question though would be derivatives such as equity options.

If you're simply trying to increase your expected return over the long term though, rather than simply increasing your risk profile, there isn't much beyond equity index funds since, as you can see from the roulette example, increasing your risk exposure has the terrible consequence of bringing forth irrecoverable losses.

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    OP did say in the question '...are there other investments that carry higher expected values than stocks or stock-based ETFs...' so I think the roulette comment is uncalled for.
    – jcm
    Jan 19, 2019 at 20:12
  • Yes, an answer starting "not worried about expected return values" seems totally off-topic for a question which is completely focused on expected return.
    – Ben Voigt
    Jan 19, 2019 at 23:36

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