A comparison of long-term performance reveals that a buy-and-hold strategy in the S&P 500 index fund (SPY) has consistently outpaced the average return of college endowment portfolios. The divergence suggests a potential opportunity for institutions to reassess their investment allocation.
- SPY delivered a 9.1% annual return from 2000 to 2025, outperforming the average college endowment return of 4.9%
- The 4.2-percentage-point annual gap translates to a $240 million difference over 25 years for a $2 billion endowment
- Endowments historically relied on active management and alternative assets, which increased fees and reduced efficiency
- Reallocating 30% of an endowment to SPY could fund tuition-free education or expand student aid programs
- The performance gap underscores a strategic opportunity in institutional asset allocation
- Long-term passive investing may reduce risk and improve transparency in university financial management
Since 2000, a hypothetical $100,000 investment in the SPY ETF—tracking the S&P 500—would have grown to approximately $1.4 million as of 2025, delivering a compound annual growth rate of 9.1%. In contrast, the average return for U.S. college endowments over the same period was 4.9%, according to publicly reported data. This 4.2-percentage-point annual gap represents a significant underperformance, particularly when adjusted for inflation and risk-adjusted returns. The disparity stems from the divergence in investment philosophies: SPY’s passive, low-cost model emphasizes broad market exposure, while many endowments historically relied on active management, hedge fund allocations, and alternative assets. Research shows that endowment portfolios often carry higher fees and lower diversification efficiency, contributing to the performance gap. If institutions reallocated even a portion of their portfolios to low-cost index funds like SPY, the long-term financial impact could be transformative. For example, a $2 billion endowment shifting 30% to SPY could generate an additional $240 million in cumulative returns over 25 years. This capital could directly fund student scholarships, academic programs, or tuition-free initiatives without requiring new fundraising. The shift would not only improve financial outcomes but also address growing scrutiny over endowment spending and institutional accountability. As tuition costs continue to rise, the potential for performance-driven reinvestment is increasingly compelling for policymakers and university boards.