Regularly investing in high-quality companies using a Stocks and Shares ISA is a tax-efficient way to tap into the rewards of compounding. And while stock picking has greater potential for returns, most investors are more comfortable simply putting their money into an index fund.
After all, leading indexes like the FTSE 100, FTSE 250, S&P 500, and Nasdaq 100 all contain some of the largest businesses in the UK and US.
But following all the recent stock market turmoil, how much money would I have made if I had invested £20,000 in 2017 after the annual ISA allowance was increased? Let’s find out.
Battle of the indexes
There are lots of stock market indexes available, each one different. The S&P 500 contains the largest 500 publicly-traded companies on American exchanges. The FTSE 100 and Nasdaq 100 are similar but contain the top 100 on the London and Nasdaq exchanges, respectively. And lastly, the FTSE 250 includes the largest 101st to 350th firms in London.
These lists may seem arbitrary, but they’re designed to represent most of the publicly-traded wealth in the UK and the US. That’s why they’re so often used as a performance benchmark for stock pickers. But suppose an investor decided to buy shares in a low-cost tracker. How much money would each index have generated?
| FTSE 100 | FTSE 250 | S&P 500 | Nasdaq 100 | |
| Six-Year Return | 31.5% | 21.3% | 109.4% | 91.3% |
| Annualised Return | 4.7% | 3.3% | 13.1% | 11.4% |
| Portfolio Value | £26,295 | £24,254 | £41,886 | £38,260 |
Which index is better for an ISA?
A quick glance at these results suggests the best investment was the S&P 500. Achieving an average 13.1% annualised gain is certainly nothing to scoff at. And if I were to invest £500 each month at this rate of return, my Stocks and Shares ISA would reach the £1m threshold in just over 24 years.
However, in practice, the answer isn’t as clear-cut. While US indexes have generated the highest returns, it’s not been without significant volatility. Most of the gains achieved can largely be attributed to the rise of technology stocks – something that both the FTSE 100 and FTSE 250 have a discernible lack of exposure.
Therefore, even though investing in an S&P 500 or Nasdaq 100 index fund would result in indirectly owning a large collection of companies, the returns are still driven by a handful of firms. So it’s no surprise that when tech stocks were sold off in 2022, the indexes dropped by around 25% and 33%, respectively.
By comparison, the FTSE 250 only dropped by 19.7%, while the FTSE 100 actually increased by nearly 1%. Higher returns breed volatility. And for many investors, watching roughly a quarter of their net worth evaporate within a year will trigger panic.
The bottom line
Regardless of the choice of index, if I had invested £20k in my Stocks and Shares ISA in 2017, I would have increased my wealth. US stocks provided the greatest returns, but UK shares offered far superior shelter from volatility in recent years.
Picking the right index to follow ultimately depends on an investor’s appetite for risk. Personally, I remain firmly in the camp of stock picking. The risks and volatility are higher, but with my average annual return sitting in the double digits, it’s so far proven to be one worth taking.
