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Invested in the FTSE 100? I think you should also invest in this index

There are many advantages of investing in a FTSE 100 tracker fund. For example, through a related ETF you’ll get exposure to 100 large-cap stocks, meaning you’ll instantly have a degree of diversification within your portfolio. The Footsie also has a fairly impressive dividend yield, meaning you’ll collect healthy dividend cheques too.

The FTSE 100 isn’t perfect

Yet the index also has its flaws. For example, I see the FTSE 100 as a rather backward-looking index. What I mean by this is that the index contains a number of companies that have been extremely successful in the past, yet may not enjoy the same success in the future.

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Take oil giants Shell and BP, for instance. In the past, the world ran on oil so these companies benefitted, but will that still be the case in 20 years’ time? Similarly, there are the big tobacco stocks, which are struggling as smoking rates decline. Even banking stocks such as HSBC face challenges, the way FinTech is progressing and impacting the banking industry. The bottom line here is that, going forward, I don’t think you should assume the FTSE 100 will generate the same returns it has in the past.

For this reason, I believe it’s essential UK investors give some thought to the US’s S&P 500 index as well as the FTSE 100. Here’s a concise look at this powerhouse index.

The champions of tomorrow

Relative to the FTSE 100, I see the S&P 500 as a much more forward-looking index, simply because it contains a much a higher weight to the technology sector.

For example, at the top, there’s Microsoft, which is a huge player in the software and cloud industries. There’s Apple, Warren Buffett’s top holding, whose products can be found in the majority of households these days. There’s Amazon, which continues to transform the way we shop. And there’s Google, which is at the heart of the internet. Can you afford to have no exposure to these kinds of stocks in your portfolio?

Growth theme

Yet this is just the beginning. In the S&P 500, you’ll also find world-class payments companies such as PayPal, Visa, and Mastercard, cybersecurity stocks such as Fortinet and Symantec, as well as video gaming (a huge growth industry) stocks such as Activision Blizzard. There’s also Netflix, which has transformed the way we watch television over the last decade. 

Additionally, the index is also home to a number of well known, world-class companies. For example, there’s Nike – one of the largest sporting brands in the world. There are beverage giants Coca Cola and PepsiCo, and there’s Colgate-Palmolive, which owns Colgate toothpaste.

Overall, the S&P 500 index is far more diversified than the FTSE 100 and it also has far more truly world-class stocks, in my opinion.

Impressive performance

Since the Global Financial Crisis, the S&P 500 has outperformed the FTSE 100 significantly, returning around 230% over the last 10 years, versus 80% for the FTSE 100 (not including dividends). That’s a big difference.

And I think there’s a chance the S&P 500 could continue to outperform due to its technology exposure. For this reason, I think UK investors should definitely consider an allocation to this index within their portfolios, whether that’s through an ETF or a US-based or global fund.

An allocation to the S&P 500 could add diversification for UK investors, and also potentially boost overall portfolio returns.

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Edward Sheldon owns shares in Royal Dutch Shell, Apple, and Alphabet. John Mackey, 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. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Apple, Mastercard, Microsoft, Netflix, Nike, PayPal Holdings, and Visa. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool UK has recommended HSBC Holdings. 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.