Colleges across the country hold billions of dollars in endowment funds, investing in everything from private equity to hedge funds. These institutions have access to elite financial managers and exclusive investment opportunities, yet year after year, they trail behind basic index funds like the S&P 500 and NASDAQ 100.
Over the last decade, college endowments have returned just 67% of the S&P 500’s performance and 37% of the NASDAQ 100’s growth. That means if they had simply invested in an S&P 500 index fundtheir assets would be nearly 50% larger today. If they had followed the NASDAQ 100their portfolios would have more than doubled.
Despite this consistent underperformance, endowment managers justify their strategies by citing risk management. However, their asset allocations don’t support that argument. With most holding only 10% in fixed income investmentsthese portfolios already carry substantial risk. So why are colleges sticking with investment strategies that leave billions on the table?
Given this relatively high-risk mix, colleges could significantly enhance their investment returns — without increasing risk — by shifting a greater portion of their endowments into low-cost, broad-based index funds and exchange-traded funds (ETFs). By doing so, they would reduce management fees, enhance diversification, and capture more of the market’s long-term growth. It could also free up more money for student financial aid and campus improvements.
College Endowment Performance
This chart compares the average annual return on investment for college endowments with the S&P 500 since 2011. The data is presented on a fiscal year basis running from July 1 to June 30.
The S&P 500, which tracks the 500 largest U.S. companies, is easily accessible to investors through ETFs such as Vanguard VOO, State Street SPY, and iShares IVV.
As this chart shows, the S&P 500 had a greater return on investment than college endowments in every year except one. The investment returns are before subtracting the fees that colleges pay to their investment managers, so the actual gap in returns is even wider.
The average annual return on investment was 8.3% for college endowments, compared with 13.3% for the S&P 500.
On average, college endowments target a 7.5% rate of return on investment. This rate of return is designed partly as a hedge against inflation and partly based on spending requirements and investment management fees.
Even a very conservative investment mix, with two-thirds invested in the S&P 500 and one-third in cash, would have outperformed the average college endowment.
To make it clearer, this chart shows just the difference between the average rate of return on investment for college endowments and the S&P 500. On average, the S&P 500 beat college endowments by 5.1% from 2011 to 2024.
Cumulative Returns: Endowments vs. Market Indexes
Long-term cumulative returns magnify the difference between actively managed college endowments and passive index funds.
This chart shows the average cumulative return on investment for college endowments and the S&P 500 since 2011. Although college endowments demonstrated an impressive 188% cumulative gain, the S&P 500 more than doubled this, with a 431% cumulative gain on investment. Both, however, are dramatically shadowed by the 1021% cumulative gain from investments in the NASDAQ 100.
These figures illustrate the dramatic performance gap between college endowments and passive investment strategies.
The Case For Investing In Technology Stocks
Colleges could significantly improve their performance beyond the S&P 500 by investing in technology stocks.
The NASDAQ 100, which tracks the top 100 companies in the NASDAQ and is available through the Invesco QQQ ETF, has consistently outpaced the S&P 500.
This index is tech-heavy, with its top holdings including the so-called Magnificent Seven:
- Alphabet (Google)
- Amazon
- Apple
- Meta (Facebook)
- Microsoft
- NVIDIA
- Tesla
Collectively, these companies represent more than 40% of the holdings of the NASDAQ 100 by market capitalization.
Since 2011, the NASDAQ 100 has delivered an average annual return of 20.1%, more than double the average return on investment of college endowments.
Endowment Tax
The largest college endowments pay an excise tax on their net investment returns, reducing the funds available for student financial aid and other college priorities.
The Tax Cuts and Jobs Act of 2017 introduced a 1.4% excise tax on the net investment income of college endowments. This tax applies to private colleges and universities with at least 500 students and endowment assets of at least $500,000 per full-time-equivalent student. (26 USC 4968) Public colleges are exempt from this tax.
Several legislative proposals have sought to increase the tax rate more than tenfold. For example, Rep. Mike Lawler (R-NY-17) introduced the Endowment Accountability Act (HR 118-9213) to increase the endowment tax to 10% and reduce the per-student threshold to $200,000. Rep. Troy E. Nehls (R-TX-22) introduced the Endowment Tax Fairness Act (HR 119- 446) to increase the endowment tax rate to 21%. The recent menu of budget reconciliation proposals would increase the endowment tax to 14%.
The endowment tax is not reduced if a college increases the amount of student financial aid or provides a particular amount of financial aid to its students.
College Endowment Spending Policies
According to a 2023 Congressional Research Service (CRS) report, College and University Endowments: Payout Rates and Spending on Student Financial Aid (IN12126), colleges typically target a 4.5% endowment spending rate, with a high of 4.8% in 2021. This is lower than the 5.0% spending requirement for private foundations.
Nearly half of all endowment spending supports student financial aid.
Conclusion
Despite having access to elite investment opportunities, college endowments significantly underperform passive index funds. By reducing management fees and reallocating toward low-cost ETFs, colleges could dramatically improve their returns while maintaining risk levels comparable to their existing portfolios.
The data suggests a compelling takeaway: sometimes, the best investment strategy is the simplest one.
These charts are based on equal-weighted average college endowment investment return data from the National Association of College and University Business Officers (NACUBO).
This data is more recent than the data presented in Table 333.90 of the Digest of Education Statistics, which is based on the Integrated Postsecondary Education Data System (IPEDS). IPEDS data includes the following variables, which include information on the size of the largest college endowments in addition to the net return on investment.
- F2H01 Value of endowment assets at the beginning of the fiscal year
- F2H02 Value of endowment assets at the end of the fiscal year
- F2H03B Endowment net investment return
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