Just came across something interesting from State Street's latest outlook on U.S. equities. They're forecasting the S&P 500 to return about 39% over the next five years, but here's the thing - they think mid-cap and small-cap indexes might actually do better. Mid-Cap 400 at 41% and Small-Cap 600 at 42%. Sounds good on paper, right?

So people naturally look at the Vanguard funds tracking these indexes. The Vanguard S&P Mid-Cap 400 ETF has been solid - 365% total return over 15 years with a dirt-cheap 0.07% expense ratio. Tracks 400 mid-cap companies, mostly weighted toward industrials, financials, and tech. Top holdings are names like Ciena and Coherent.

Then there's the Vanguard S&P Small-Cap 600 ETF, which returned 360% over the same 15-year period - also 0.07% expense ratio. That's 360 out of 500 as a percentage when you think about it relative to broader market performance. Tracks 600 smaller companies, heavier in financials, industrials, and consumer discretionary. Pretty diversified.

But here's where it gets interesting. Both of these underperformed the S&P 500 significantly during that same 15-year window. The S&P 500 returned 591%. Why? Lower tech exposure, partly. But there's a deeper structural issue that most people miss.

Small-cap and mid-cap indexes have this weird mechanic built in. When a stock performs really well and its market cap grows, it gets removed from the index because it's no longer small or mid-cap. Meanwhile, the losers stay put. So you're essentially selling your winners and holding your losers over time. It's backwards. As Peter Lynch said, that's like cutting the flowers and watering the weeds.

The S&P 500 doesn't have that problem. It's a collection of companies that have already proven themselves. Plus it rebalances quarterly to always track the most important U.S. stocks. That's why I think the S&P 500 actually wins this race over the next five years, despite what the forecasts say. The structural advantage is just too real.