Over the past couple of years, the stock market in the US has exploded higher. There are many valid reasons for this, including the concentration of tech stocks in the S&P 500. Even though I’m a UK investor, I don’t have any major restrictions as to investing the other side of the pond. So it got me thinking about what the difference in profit would be if I’d put money in the S&P 500 instead of the FTSE 100.
Calculating the numbers
If I’d invested £1,000 in a S&P 500 tracker fund this time last year, it would currently be worth £1,350.29. By contrast, my FTSE 100 tracker fund would be worth £1,080.61.
The difference £269.68. This is a lot, especially when I consider that it’s almost a 27% difference in the space of just one year!
The index performance is simply the sum of all the individual constituents within it. So when I look at the top-performing shares, I can see one factor that has caused the large divergence. For example, in the S&P 500, Vistra Corp (NYSE:VST) is up 322% over the last year. Nvidia isn’t far behind, with a whopping 206% gain.
When I look at the FTSE 100, the best performing stock is Rolls-Royce, up 152%. The second best is Marks and Spencer, up 72%. So there’s a clear difference in the size of gains from the stocks that help to lead the charge for each overall index.
A different mix
Another reason for the difference is due to the stocks that are included. The S&P 500 contains some of the largest and hottest stocks, particularly those related to artificial intelligence (AI). This has been one of the most profitable themes in 2024, with a significant number of investors jumping on the bandwagon.
Vistra Corp is a great example. It’s an integrated retail electricity and power generation company. The stock price has surged recently due to the expectation of higher demand from energy-hungry AI processes. More tech giants are looking to make use of nuclear energy as a lower-cost and more sustainable form of power.
So even though Vistra isn’t a conventional AI stock, the indirect benefit from the growth in this area should have a significant positive impact on the company. Of course, one risk here is that the financial payoff is likely some way off, as new plants need to be built and have contracts agreed. I’m not saying the share price is in a bubble, but investors are clearly excited (maybe a little too excited).
On the other hand, the FTSE 100 is weighted towards resources stocks — like miners and oil giants — and shares in financial services. Such sectors may or may not have had a bad year, but even on the plus side, there haven’t been the same kind of growth expectations in comparison to something like AI.
Looking ahead
Past performance doesn’t guarantee future returns. Some flag up that the US looks overvalued. For example, the average price-to-earnings ratio for the S&P 500 is 29.93. For the FTSE 100 it’s 14.47. So the S&P 500 is basically twice as expensive!
From that angle, I can make an argument for saying that if I had invested last year, I’d consider banking some profit and reinvesting that money in UK stocks now instead.
