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

Ben McPoland thinks one FTSE 100 stock might offer a compromise between high US market growth and cheap Footsie valuations.

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Comparing the USA’s S&P 500 with the UK’s FTSE 100 is a bit like comparing apples to oranges. They’re different beasts. We can see that most clearly in their respective dividend yields and rates of returns.

The FTSE 100’s average yield of 3.52% towers above the 1.35% offered by the S&P 500. But the latter has produced an annual average of around 10.2% over the last few decades compared to the Footsie’s near-8% (both figures are with dividends reinvested).

This points towards their different characteristics. The UK blue-chip index is packed with mature dividend-paying companies, whereas the US index is dominated by global tech firms like Microsoft that relentlessly pursue new avenues of growth, the latest being artificial intelligence (AI).

Which one would I favour today, if I had to choose? Let’s take a look.

Wide discount

After surging 11% in 2024, the S&P 500 sits just under an all-time high. While that may indicate this is an inopportune time to invest, history suggests otherwise.

In 1995, for example, the index hit a new all-time high in nearly one out of every three trading days (77 new highs). Yet if I’d held my nerve back then and invested £10,000 anyway, I’d have over £130,000 today.

Of course, that would have been a buy-and-forget approach with a lump sum. But that’s not what I’m doing.

Instead, I’m investing my savings every month. Therefore, I want to get the best value I think I can when I invest every few weeks.

Right now, the S&P 500’s forward price-to-earnings (P/E) ratio is nearly 20. That compares to a forward P/E multiple of just 11 for the FTSE 100.

Analysts at HSBC recently pointed out that the UK market’s cheaper than other global benchmarks, with the discount to the US stock market a massive 23% wider than usual.

Footsie focus

In recent months then, I’ve been more focused on buying Footsie stocks, particularly those like Legal & General offering 8%+ dividend yields.

By contrast, I’m seeing very little value in many of my favourite US stocks right now. The market looks very pricey, leading me to favour FTSE 100 shares.

The best of both worlds

Having said that, a compromise might be found by investing in Pershing Square Holdings (LSE: PSH).

This is a FTSE 100 fund that gives investors a chance to put their money behind legendary US hedge fund manager Bill Ackman. The stock’s up 212% in five years.

Ackman runs a very concentrated portfolio with just 8-12 mainly US stocks. These include Google parent Alphabet and Chipotle Mexican Grill.

However, he often uses derivatives as a kind of insurance policy (or hedge) for his investments. These do add complexity and can be risky if not managed properly.

But they can also result in spectacular returns during times of market volatility.

In early 2020, for example, Ackman bet that many companies would struggle financially if Covid turned into a global pandemic. In less than a month, he turned $27m into $2.6bn!

The great thing here is that Pershing Square shares are trading at a 25% discount to the fund’s net asset value. To me then, the stock offers a way to invest in high-quality US growth stocks on the cheap.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Ben McPoland has positions in Alphabet, HSBC Holdings, Legal & General Group Plc, and Pershing Square. The Motley Fool UK has recommended Alphabet, HSBC Holdings, 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.

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