Image source: Getty Images
In recent years, the US stock market has soared. There are many valid reasons for this, including the concentration of technology stocks in the S&P 500. Although I am a UK investor, I have no major restrictions on investing across the pond. So it got me thinking about what the difference in profits would be if I had put money into the S&P 500 instead of the FTSE 100.
calculating the numbers
If you had invested £1,000 in an S&P 500 tracking fund this time last year, it would be worth £1,350.29 today. By contrast, my FTSE 100 tracking fund would be worth £1,080.61.
The difference £269.68. This is a lot, especially considering that it is almost a 27% difference in just one year!
The performance of the index is simply the sum of all the individual components that make it up. So when I look at the best performing stocks, I can see one factor that has caused the big divergence. For example, in the S&P 500, Vistra Corp (NYSE:VST) is up 322% over the last year. NVIDIA is not far behind, with a whopping 206% gain.
When I look at the FTSE 100, the best performing stock is Rolls-Roycean increase of 152%. The second best is Marks and Spenceran increase of 72%. Therefore, there is a clear difference in the size of the gains of the stocks that help lead the charge for each broad index.
A different mix
Another reason for the difference is due to the actions that are included. The S&P 500 contains some of the largest and most popular stocks, particularly those related to artificial intelligence (ai). This has been one of the most profitable themes in 2024, with a significant number of investors jumping on the bandwagon.
Vistra Corp is a great example. It is an integrated retail electricity and energy generation company. The stock price has soared recently on expectations of increased demand for energy-intensive ai processes. More and more technology giants are seeking to make use of nuclear energy as a cheaper and more sustainable form of energy.
So while Vistra is not a conventional ai stock, the indirect benefit of growth in this area should have a significant positive impact on the company. Of course, a risk here is that the financial reward is probably a long way off, as new plants need to be built and contracts agreed. I'm not saying the stock price is in a bubble, but investors are clearly excited (maybe a little too excited).
On the other hand, the FTSE 100 is tilted towards resource stocks (such as miners and oil giants) and financial services stocks. These sectors may or may not have had a bad year, but even on the positive side, there hasn't been the same type of growth expectations compared to something like ai.
Looking forward
Past performance does not guarantee future returns. Some point out that the United States seems overvalued. For example, the average P/E ratio for the S&P 500 is 29.93. For the FTSE 100 it is 14.47. So the S&P 500 is basically twice as expensive!
From that angle, I can argue that if I had invested last year, I would consider building up some profits and reinvesting that money into UK shares now.
