Should I invest in the FTSE 100 or the S&P 500?

Both the FTSE 100 and its US counterpart offer investors a quick and easy way to diversify their portfolios. But which index looks the better buy today?

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.

The Mall in Westminster, leading to Buckingham Palace

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I love to buy individual stocks, but I can see why index investing has some advantages. The main one is that I’m able to invest in all the stocks in, say, the FTSE 100 without having to pick and choose. This would give me instant diversification in one fell swoop.

One of the most popular indexes in the world is the S&P 500. This collection of companies has generally outperformed the UK stock market for decades now.

However, the FTSE 100 is cheaper and pays a much higher dividend than the S&P 500. So which one should I invest in? Let’s explore.

The Footsie

London’s blue-chip index hit a new all-time high of over 8,000 points back in February. Then a handful of banks ran into trouble at the beginning of March and the FTSE 100 sold off.

However, now the dust has started to settle and a full banking meltdown looks unlikely, and the Footsie has bounced back. In fact, since its March low, it has risen over 6%.

Below is the index’s performance versus the S&P 500 over four time periods.

TimeframeFTSE 100 S&P 500
6 months+14.2%+11.5%
1 year+3.2%-8.0%
3 years+35.5%+42.3%
5 years+7.7%+54.0%

These returns don’t factor in dividends, which make the FTSE 100 so attractive to many investors. That’s because it currently yields an average 3.5%, which is about double the yield of the S&P 500.

However, this high yield does hint at a perceived weakness of the FTSE 100. This is that it’s heavily skewed towards ‘old-world’ companies, such as dividend-paying miners and oil giants.

Indeed, UK-focused fund manager Nick Train recently said the UK was a “backwater” of global markets. Ouch!

The strategy I settled upon a few years ago is similar to Train’s. I cherry-pick what I consider to be the best 20% or so of companies in the FTSE 100 and hold these as large positions. I don’t bother with the index because around half of it doesn’t appeal to me.

The S&P 500

As the name implies, the S&P 500 tracks more stocks than the FTSE 100. That means if I picked the best 20% here I’d end up with 100+ stocks in my portfolio. I consider that far too many for me to follow.

So, in theory, I see much more value in utilising an S&P 500 index fund. I’d get instant exposure to the fortunes of hundreds of powerful global companies.

My concern though is that it’s very tech-heavy, with Apple having an approximate 7% weighting. Other mega-caps include Microsoft, Google-parent Alphabet, and Amazon. In fact, just these four shares make up around 20% of the index.

Meanwhile, Berkshire Hathaway, which is also quite heavily represented, also has a massive stake in Apple. And the iPhone-maker is also in my own portfolio, as is Alphabet (a recent addition last month).

So, for me, there’s a risk of portfolio overconcentration (particularly in Apple) were I also to invest in the S&P 500.

Therefore I’m going to keep investing in individual stocks from both indexes, whenever I identify timely opportunities. This strategy has served me well for many years now. And, as the old saying goes, if something ain’t broke, don’t fix it.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former 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. Ben McPoland has positions in Alphabet and Apple. The Motley Fool UK has recommended Alphabet, Amazon.com, Apple, and Microsoft. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »