Can GQG's Active ETF GQGU Outperform the S&P 500?

The debate between active and passive investing has raged for decades, with the S&P 500 index serving as the ultimate benchmark for U.S. equity performance. In a market where 85% of active managers fail to beat their benchmarks over a rolling 10-year period, the case for active management has seemed increasingly tenuous. Yet GQG Partners' new GQGU ETF, launched in July 2025, is making a bold claim: it can deliver alpha through a disciplined, low-cost approach to active management. This article examines whether GQGU's concentrated portfolio of high-quality stocks, led by CIO Rajiv Jain, can truly outperform the S&P 500 in a crowded ETF landscape.

GQGU's investment strategy diverges from both passive indexing and many active managers. Rather than broadly diversifying across 500 companies, the fund holds just 34 stocks, emphasizing quality over quantity. These holdings include companies like Philip Morris International, AT&T, and Verizon - names that might surprise investors expecting a tech-heavy growth portfolio. This concentrated approach reflects GQG's philosophy of identifying companies with strong financial strength, sustainable earnings growth, and quality management - factors that historically correlate with long-term outperformance.

The fund's expense ratio of 0.49% is particularly compelling in the active ETF space, where fees often exceed 0.75%. This low-cost structure is possible because GQGU avoids the high trading costs of many active funds through its low turnover strategy (0.00% annual turnover). The fund's predecessor, the GQEPX private fund, demonstrated this approach's effectiveness: since 2014, it delivered 15.81% annualized returns vs. the S&P 500's 13.08%. Over five years, it returned 17.19% vs. 13.78% for the index.

However, the recent past has been more challenging. In the first half of 2025, GQGU lost 0.60% vs. the S&P 500's 3.45% gain in the same period. This underperformance raises questions about the fund's ability to navigate current market conditions, particularly in a year marked by trade policy uncertainties and a nearly 20% S&P 500 decline at one point. The fund's concentrated portfolio, while offering the potential for outsized gains, also increases the risk of underperformance if a few key holdings underperform.

GQGU's risk profile is another critical consideration. With a 5-day volatility of 5.77%, the fund ranks in the top third of all ETFs for volatility. This volatility is partly due to its concentrated nature and sector allocations. The fund has reduced exposure to overvalued tech stocks while increasing holdings in defensive sectors like telecommunications and consumer staples. This strategic shift reflects GQG's belief that structural changes in these sectors create long-term value, but it also means the fund will diverge significantly from the S&P 500's composition.

The active ETF market itself presents both opportunities and challenges. With 2,226 active ETFs now in the U.S. vs. 2,157 passive ones, competition is fierce. Yet GQGU has attracted $208.58 million in assets since its launch, suggesting investor interest in its unique approach. The fund's 0.10% premium to NAV indicates market confidence in its strategy, even if performance hasn't yet fully justified it.

GQG's competitive positioning is strengthened by its manager's track record. Rajiv Jain and his team have demonstrated the ability to select companies that outperform their peers over multiple market cycles. Their approach combines fundamental research with active risk management, seeking to deliver positive returns in both up and down markets. This is particularly relevant in today's economic environment, where volatility and uncertainty are likely to persist.

Investors considering GQGU should weigh several key factors:

1. Cost Efficiency: At 0.49%, the fund's expense ratio is among the lowest in its category, making it an attractive option for investors seeking active management without excessive fees.

2. Concentration Risk: The fund's 34-stock portfolio means the performance of a few key holdings will have outsized impact. This can lead to both higher returns and higher volatility.

3. Style Drift: GQGU's emphasis on high-quality, low-valuation stocks means it will often look nothing like the S&P 500, which has become increasingly dominated by mega-cap tech stocks.

4. Time Horizon: The fund's strategy is designed for long-term capital appreciation. Short-term volatility should be expected, and investors should hold for several years to give the strategy time to play out.

5. Market Conditions: The fund's performance will vary depending on economic cycles. Its emphasis on quality and defensive sectors may provide downside protection during market corrections.

The broader ETF landscape is also evolving rapidly. As of June 2025, active ETFs have captured $330.7 billion in global inflows, representing 22.24% of all ETF inflows. This growth reflects investor demand for products that can adapt to changing market conditions and offer differentiated outcomes. GQGU's focus on high-quality stock selection and active risk management aligns with this trend, positioning it as a potential leader in the next phase of ETF innovation.

While GQGU has yet to fully prove itself against the S&P 500 in the short term, its long-term prospects look promising. The fund's disciplined approach to stock selection, combined with its low-cost structure and experienced management team, creates a compelling value proposition. Investors who can stomach the volatility and maintain a multi-year time horizon may find GQGU offers a unique opportunity to outperform the market through active management.

For those seeking a more conservative approach, a core S&P 500 ETF remains a solid option. But for investors willing to take on a bit more risk in exchange for the potential for higher returns, GQGU represents an intriguing alternative. As the ETF market continues to evolve, the success of funds like GQGU will be critical in determining whether active management can once again prove its worth in the age of indexing.