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The S&P 500 is crushing the FTSE 100 but I’d still buy UK shares

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In recent years, the main US stock market index, the S&P 500, has outperformed the FTSE 100 by a wide margin. It’s not hard to see why. The former has growth stocks like Apple, Amazon, and Microsoft in its top 10 constituents. The latter has stocks like Royal Dutch Shell, GSK, and British American Tobacco (which are all struggling) in its top 10.

Looking ahead, I expect the US market to continue crushing the UK market in the long run simply because the US has a much higher level of exposure to the technology sector. For this reason, I’ve been ramping up my exposure to US shares in recent years (my largest holdings are currently Alphabet, Apple, and Amazon). Having said that, I still believe UK shares have a place in my portfolio. Here’s a look at two reasons I’m still buying UK stocks.

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UK shares can provide portfolio protection (and dividends)

One reason I’m still buying UK shares is that I think they can play an important role from a risk-management perspective. The UK market is home to some great ‘defensive’ stocks and these stocks can help me balance my portfolio.

Examples of defensive stocks I like include consumer goods giant Unilever and alcoholic beverages group Diageo. These stocks tend to be quite resilient due to the nature of their businesses. When markets are volatile and growth stocks such as Apple and Amazon are dropping like a stone, the share prices of Unilever and Diageo tend to hold up pretty well. Both are reliable dividend-payers, as well.

By owning these kinds of defensive UK shares in my portfolio, I can potentially lower my overall risk.

UK stocks can deliver big returns 

Another reason I’m still buying UK shares is that there are some brilliant growth companies in the small- and mid-cap areas of the market. And many of these companies are delivering huge returns for investors like myself.

Some examples of UK small-cap shares that have done very well for me in recent years include:

  • dotDigital: this is a fast-growing software-as-a-service company that specialises in digital marketing solutions and is benefitting from the e-commerce boom. Over the last five years, its share price has risen over 400%.

  • Gamma Communications: this is a mid-cap company that specialises in unified communications and is benefitting from the ‘hybrid’ work trend. Over the last five years, its share price has risen nearly 400%.

  • Alpha FX: this is a UK FinTech company that specialises in FX hedging solutions. Since it came to the market in 2017, its share price has risen nearly 800%.

  • GB Group: this is a UK technology company that specialises in identity management solutions. Over the last five years, its share price has risen nearly 200%.

These are just some examples of UK shares that have delivered amazing returns in recent years. There are many more.

Of course, not every small-cap or mid-cap UK stock is going to generate big returns. There are always going to be stocks that underperform, including those cited above that could still see their performances dipping.

However, I’ve found that adding a selection of high-quality small- and mid-cap UK shares to my portfolio has boosted my overall returns significantly.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Alpha FX, Alphabet (C shares), Amazon, Apple, Diageo, GB Group, Gamma Communications, Microsoft, Unilever, and dotDigital Group. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Microsoft. The Motley Fool UK has recommended Alpha FX, British American Tobacco, Diageo, Gamma Communications, GlaxoSmithKline, Unilever, and dotDigital Group and has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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