Index Funds That Can Beat the S&P 500

For investors in taxable accounts, the most likely way to beat the benchmark may be with (VMCAX Quote)Vanguard Tax-Managed Capital Appreciation, which topped the S&P by a percentage point after taxes during the past decade.

Vanguard Tax-Managed tracks the Russell 1000, a close competitor of the S&P 500. But the Vanguard fund is not technically an index fund. The portfolio managers deviate slightly from their benchmark, using a variety of techniques to lower tax bills. For example, the fund sometimes sells downtrodden stocks, booking the losses, which can be used to offset taxable capital gains. The result is a fund that closely mimics its index while dodging the taxman.

By owning the tax-managed portfolio, shareholders should end up with more money in their pockets than if they had purchased a conventional S&P 500 fund.