Index tracking with a few stocks: is that possible?

In recent years it has not been easy as a portfolio manager to beat indices such as the S&P 500 or the Nasdaq 100. It is difficult to assess whether this is a purely temporary phenomenon or a structural issue. The fact is that only a few active funds and portfolios have outperformed the highly capitalized US stock indices in recent years. This was partly due to the fact that the particularly highly capitalized stocks in the major indices performed so extremely well that outperformance in an active portfolio would almost only have been possible if these stocks had been overweighted again - a decision that one under risk and diversification aspects could hardly have justified.

All of this speaks even more in favor of making portfolio construction an integral part of portfolio management during selection, in order to keep an eye on the tracking error and be able to control it even better.

But is that even possible with a limited number of shares? We did the math and were a little amazed at the results ourselves.