Why has the FTSE 100 consistently underperformed the S&P 500?

Does the motto ‘buy local’ make sense when my money is at stake? Unless things change dramatically, buying a FTSE 100 tracker might do my portfolio more harm than good.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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The FTSE 100 has returned investors a stunningly meagre 10% since summer 2000, assuming the reinvestment of dividends. Indeed, despite all of the fiscal stimulus, we still haven’t reached the 2018 highs, and even investors who made the plunge some 22 years ago will have been in the red for most of last year.

When inflation is brought into the equation, things look even more dire for the FTSE 100. By way of comparison, property in London has risen, according to a conservative estimate, over 200% in the same period, with some areas seeing a 7x lift. This indicates just how much purchasing power I’d have lost with the FTSE 100.

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By contrast, the S&P 500 has been delivering about 12.5% annually for the last 20 years, and my money would have now more than doubled since summer 2000 (again assuming that I reinvested my dividends). This would have allowed me to outstrip CPI inflation significantly, without taking too much risk.

Has it always been this bad?

No. If I’d have invested in a FTSE 100 index fund between July 1984 and July 2000, I’d have seen my shares roughly 5x. With that said, I’d have seen my S&P 500 shares roughly 10x over the same period. So, while the S&P 500 returns have long been higher, the gap between the returns has widened.

Speculating about why this might be the case, what jumps out at me is the obvious difference in the sector exposures of each index. Whereas defensive and value stocks such as oil and bricks-and-mortar retail companies dominate the FTSE 100, technology companies make up approximately a third of the S&P 500 index, and several of these (i.e. the FAANGs) have exploded in value over the last decade.

Could the divergence also have something to do with numbers? After all, the S&P contains 500 companies, while the FTSE only has 100. It might appear this way, since the FTSE 250 has seriously outperformed the FTSE 100. Then again, the FTSE 250 consists of smaller-cap stocks, which can lead to relative outperformance. Even then, it’s lagged behind its US peers (such as the S&P 400).

So why go for the FTSE 100?

Buying a FTSE 100 index might make sense if I wanted value stocks. The average P/E ratio of FTSE 100 companies has been around 13 over the past 10 years, compared to 23 for the S&P 500. But are some things cheap for a reason?

The FTSE also pays out a higher dividend than the S&P 500 (typically just over 3%, compared to the S&P 500’s roughly 2%). But the only way that I could have seen real returns would have been by reinvesting those dividends (or, of course, by buying the dips). Still, the same could be said for the S&P 500, so it’s hardly a game-changer.  

Maybe there’s a dose of patriotism here, too. I like to think that my stock purchases might be doing something to help the UK economy. Yet the problem, for me, is that the sector that I believe has the most upside, tech, is hardly represented in the FTSE 100.

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There’s no inherent reason why UK large caps should keep underperforming, but long-term trends can become self-fulfilling prophecies unless something is done to defy them.

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