Hello, YieldAlley readers! In this issue:
The Million-Dollar Bet That Proved Index Funds Beat Hedge Funds
Mixed Market Performance Amid Fed Policy and Trade Optimism
What the World’s Paying for Eggs
DoorDash Offering Free $75 Credit During Limited Mother's Day Promo
And more!
NEWS
Standout Stories
🏦 How Bond Vigilantes Made Trump Blink (Bloomberg)
📈 Which Stocks Had Uncertainty Ratings Raised on Tariff Concerns? (Morningstar)
🎰 Why prediction markets failed to see the American pope coming (CNN)
🏪 Nasdaq plans 24-hour trading to serve global investors by 2026 (NASDAQ)
🎢 Why Disney chose Abu Dhabi for their next theme park location (CNN)
MARKET THOUGHTS
Mixed Market Performance Amid Fed Policy and Trade Optimism
ECONOMY
The Federal Reserve held interest rates steady at 4.25-4.50% on Wednesday, citing solid economic expansion but increasing uncertainty about the outlook. Fed Chair Jerome Powell acknowledged potential challenges with competing mandates if tariffs drive inflation higher while slowing growth. The ISM Services PMI showed continued expansion at 51.6% in April, up from March's 50.8%, marking the 10th consecutive month of growth. However, the prices index jumped to 65.1%, its highest level in over two years, largely due to tariff impacts. Manufacturing remains in contraction territory, with companies responding to an uncertain economic environment through reduced production and staffing.
STOCKS
Major indexes closed the week mixed, with small- and mid-cap stocks outperforming for the fifth straight week. The S&P 500 and Nasdaq Composite declined 0.47% and 0.27% respectively, while the Dow Jones fell modestly. After Monday's retreat ended the S&P's nine-day winning streak, stocks recovered mid-week on reports of upcoming U.S.-China trade discussions in Switzerland. Additional momentum came Thursday following the announcement of the first new trade deal between the U.S. and UK since reciprocal tariffs began in April, fueling hopes for further agreements. The S&P MidCap 400 gained 0.48% and the Russell 2000 rose 0.12% for the week.
FIXED INCOME
Treasury yields generally increased through the week following the Fed announcement and positive trade headlines, resulting in negative returns for government bonds. Municipal bonds continued their rebound amid light issuance, while investment-grade corporates posted negative returns. High yield markets saw light trading volumes with favorable technical conditions supported by minimal new issuance, positive fund flows, and building cash levels. Traders noted investors focused primarily on earnings while awaiting Fed commentary.
INCOME BUILDING
The Million-Dollar Bet That Proved Index Funds Beat Hedge Funds
Back in 2007, Warren Buffett made a public challenge: he bet that a simple S&P 500 index fund would outperform any collection of hedge funds over the next decade. Ted Seides, who ran a fund-of-hedge-funds called Protégé Partners, took him up on it.
The stakes: $1 million to charity.
The matchup: Vanguard's S&P 500 index fund (0.04% expense ratio) versus five carefully selected funds-of-hedge-funds (each charging their own fees plus the fees of underlying hedge funds).
What Actually Happened
The financial crisis hit almost immediately. In 2008, the hedge funds lost 20% while the index fund dropped 37%. Seides looked smart - hedge funds were protecting capital in a downturn, just as advertised.
But over the full decade, the results told a different story:
S&P 500 Index Fund: +126%
Average of five funds-of-hedge-funds: +36%
Not one of the hedge fund portfolios beat the index. Seides conceded defeat in 2016, months before the bet officially ended.
Why Buffett Won
The math was simple but brutal. Hedge funds typically charge "2 and 20" - 2% of assets annually plus 20% of any profits. Funds-of-hedge-funds add another layer of fees on top. Meanwhile, the Vanguard fund charged 0.04%.
Even if the hedge fund managers had matched the market's performance before fees, their investors would have earned far less after costs. When you need to overcome a 3-4% annual fee disadvantage, you need to significantly outperform just to break even.
The Bogle Connection
At Berkshire's 2017 annual meeting, Buffett used his victory lap to honor Jack Bogle, who founded Vanguard and created the first index fund in 1976. Buffett told the crowd that Bogle had "saved tens and tens of billions" for American investors by providing low-cost index funds.
The sentiment online was clear. As one investor put it: "The Sage of Omaha proved what Jack and Bogleheads knew all along - passive investing is the way to go."
Seides's Counterarguments
Ted Seides maintains the bet wasn't entirely fair. His main points:
Hedge funds invest in more than just stocks - they hold bonds and other lower-returning assets
The decade after 2008 was exceptionally good for U.S. stocks
Comparing a pure stock index to diversified hedge funds is "apples to oranges"
There's some truth here. Hedge funds aim for "absolute returns" - making money in any market condition - rather than beating a specific index. But for most investors, the distinction is academic. What matters is how much money ends up in your account after fees.
What This Means for Regular Investors
1. The Fee Equation Consider two funds that both earn 8% before fees:
Fund A charges 0.05%: You keep 7.95%
Fund B charges 2.00%: You keep 6.00%
Over 30 years on a $10,000 investment:
Fund A grows to $94,000
Fund B grows to $57,000
That's a $37,000 difference from fees alone.
2. The Performance Problem Academic research consistently shows that most active managers fail to beat their benchmark index after fees. The few who do succeed in one period rarely repeat their performance in the next.
As Buffett noted in 1975: professional money managers expecting above-average performance are like poker players declaring "if we all play carefully tonight, we all should be able to win a little."
3. The Access Issue The hedge funds in this bet weren't available to regular investors anyway. They require minimum investments of millions and are limited to "qualified" investors. But even these elite funds, managing money for institutions and the ultra-wealthy, couldn't beat a fund available to anyone with $3,000.
The Bottom Line
The Buffett-Seides bet didn't discover anything new - it simply provided real-world proof of what academics and index fund advocates had argued for decades. For most investors, the lesson is straightforward:
Keep costs low (aim for expense ratios under 0.20%)
Diversify broadly (own the whole market, not individual stocks)
Stay invested for the long term (don't try to time markets)
Ignore complex strategies that promise to beat the market
As one observer noted: "The real winner was the zero coupon bond they bought for the bet." Sometimes the simplest approach really is the best one.
The money from the bet - which grew to $2.2 million thanks to a switch from bonds to Berkshire stock - went to Girls Inc. of Omaha. They used it to fund programs at a renovated facility they named, somewhat ironically, Protégé House.
INCOME BUILDING
Cash Rates
Government Money Market Funds (7-Day Yields)
SNVXX (Schwab Government Money Fund - Investor Shares): 4.04%
SPAXX (Fidelity Government Money Market Fund): 3.96%
TTTXX (BlackRock Liquidity Funds: Treasury Trust - Institutional Class): 4.16%
VMFXX (Federal Money Market Fund): 4.21%
Brokered CD Rates (6-Month Rate)
Charles Schwab: 4.14%
E*Trade: 4.20%
Fidelity: 4.20%
Merrill Edge and Merrill Lynch: —
Vanguard: 4.19%
ETFs (30-Day Yields)
SGOV (iShares 0-3 Month Treasury Bond ETF): 4.19%
BIL (SPDR Bloomberg 1-3 Month T-Bill ETF): 4.13%
USFR (WisdomTree Floating Rate Treasury Fund): 4.28%
TFLO (iShares Treasury Floating Rate Bond ETF): 4.30%
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Our Thoughts
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Picture of the Week
