Britain gets a partial solar eclipse next week, but S&P 500 investors have watched one all year. Nearly every other index constituent has disappeared into the shadow of AI.
One of the biggest beneficiaries has been SanDisk (NASDAQ:SNDK). A £10,000 investment in the memory company five years ago is now worth £19,149, but not everyone’s impressed…
Investing vs saving
Over the long term, investing tends to do better than saving. I don’t see any cash opportunity that’s returned 91% in the last five years.
This isn’t an accident. Investing means owning businesses and these tend to compound capital more efficiently than savings accounts do.
The downside, however, is that there are no guarantees. Past performances don’t automatically mean future returns and share prices don’t move in straight lines.
That can create issues. So while it’s strictly possible to sell investments any time the stock market is open, it’s better to treat them as illiquid multi-year investments.
S&P 500 returns
An exchange-traded fund (ETF) tracking the S&P 500 has rewarded patience. The returns over the last five years have been driven by double-digit annual earnings growth across the US.
Warren Buffett has long recommended a low-cost tracker for most investors and it’s hard to argue that this is an outright bad idea. There is, however, a catch.
The catch with passivity
Buying an ETF is often thought as a strategy-neutral agnostic choice for passive investors. In reality, it’s neither of those things.
It involves committing to buying a specific collection of stocks in a set weighting. That’s a choice, just like any other.
There are also elements of strategy to it. Investors naturally find themselves buying more when share prices go higher and account for more of an index.
SanDisk is one of the best examples – it joined the S&P 500 in 2025, but now 3p of every £10 that gets invested in the index goes on the company’s shares.
This year’s runaway winner
SanDisk has been a runaway train this year. It’s up more than 500% since the start of January, driven by a shortage in NAND flash. AI data centres need enterprise storage chips faster than the industry can build them.
As a result, there’s an order backlog running into tens of billions. And the earnings report today (5 August) is expected to be strong, with gross margins near 80% and prices set to rise further.
The risk, however, is that this looks temporary. There isn’t much of a manufacturing barrier to entry and existing manufacturers can add more capacity.
That’s causing volatility in the share price right now and it makes the outlook uncertain. That makes me wary of trying to join the party at this stage with my own portfolio.
Bottom line
ETFs that track an index can be sound long-term investments. It’s hard to argue with the returns and they don’t come about by accident.
In my own portfolio, however, I’d rather look for the next SanDisk than buy this one after a 500% rally. Passive investing can work, but don’t mistake it for passive thinking.
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Stephen Wright does not own shares in any of the companies mentioned.
This story originally appeared on Motley Fool
