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The S&P 500 vs the FTSE 100 – how different are they?

Nicholas Hyett, Equity Analyst, outlines the key differences between the FTSE 100 and the S&P 500 and what they could mean for investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Investing in different stock markets doesn’t just mean choosing between countries. Instead, you could think about indices like the FTSE 100 for the UK or S&P 500 for America as being like different portfolios. The two contain very different companies, trade on very different valuations and will likely offer different returns going forwards.

We’ve outlined the key differences between the FTSE 100 and the S&P 500 and what they could mean for investors.

All investments carry an element of risk, and it’s important to remember that share prices can fall as well as rise in value, and you could get back less than you invest. This article is not personal advice. If you’re not sure if an investment is right for you, please seek advice.

Size

The FTSE 100 has a market cap of £1.6 trillion, which sounds like a lot except the S&P 500 is worth $25.6 trillion. Microsoft, the largest member of the S&P 500, has a market cap of about £1.3 trillion. So one American company is worth almost as much as the entire FTSE 100.

The 10th largest stock in the S&P 500 is Procter & Gamble, which owns brands like Pampers, Gillette, and Head & Shoulders. Proctor & Gamble has a market cap of around £240bn. The single largest stock in the FTSE 100 is AstraZeneca, which has a market cap of just £110bn.

Big in the FTSE is pretty small fry across the pond. This means an investment into the S&P 500 has more money at work in really large companies.

Concentration

The S&P 500 contains, confusingly, 505 stocks and the FTSE 100 contains 101. This is because some companies, such as Royal Dutch Shell and Alphabet, have several classes of shares.

This means that the FTSE 100 is naturally going to be a more concentrated index, but the extent of that concentration might surprise you. The top ten stocks make up 42% of the FTSE 100. By contrast, the top ten make up just 27% of the S&P 500.

Quality

But size isn’t everything. Here’s a list of the ten largest stocks by market cap in both the FTSE 100 and the S&P 500.

FTSE 100 S&P 500
AstraZeneca Microsoft
GlaxoSmithKline Apple
HSBC Amazon
British American Tobacco Facebook
Diageo Alphabet A
BP Alphabet C
Royal Dutch Shell A Johnson & Johnson
Rio Tinto Berkshire Hathaway
Unilever Visa
Reckitt Benckiser Procter & Gamble

The lack of technology at the top of the FTSE jumps out immediately. The top five companies in the S&P 500 could all be described as technology businesses, even if Amazon’s core retail business stretches the definition a little. By comparison, there isn’t anything near the top of the FTSE that could reasonably be called a tech business.

In fact, tech accounts for just 0.82% of the FTSE 100, but a full 27.5% of the S&P 500. This is a massive difference.

Instead, the FTSE 100 includes a lot of banks, oil and gas companies and miners. These companies tend to be quite cyclical meaning they’re closely linked to the economic health of the country and tend to follow the ups and downs of the economy. They generally don’t have a lot of room for explosive growth.

That’s not to say there aren’t some great businesses in the FTSE 100 – there certainly are. But the biggest names on the FTSE are very different to the biggest in the US.

These differences might go some of the way to explaining why the S&P 500 has done so well over the last 10 years. It’s important to remember though that past performance is not a guide to future performance.

FTSE 100 vs S&P 500 – 10 year performance

Past performance is not a guide to the future. Source: Refinitiv Datastream, to 30/06/2020

Valuation

The S&P 500 trades on a price to earnings ratio of 22.2, which is higher than it has been in the past, and much higher than the FTSE 100 – currently trading on a PE of 14.4. Additionally, the historic dividend yield on the S&P 500 is 1.8%, compared to 4.8% for the FTSE 100.

Whether one of these portfolios is overvalued or not is difficult to judge – and timing the market based on valuation signals is extremely difficult to get right. But as we’ve seen, these are different indices and we shouldn’t expect them to trade on the same, or even similar, valuations.

Diversify

Fortunately, we don’t need to choose one or the other. There are great investment opportunities in the US and in the UK. Investors should be aiming to hold a diverse portfolio that gives them exposure to a range of different assets. Whether you tilt towards one or the other is up to you, but the important thing is to understand what you’re invested in so you can make an informed choice.

Learn more about diversification

You can use the research our team has done on funds in the Wealth Shortlist to learn more about how fund managers approach investing in different markets. The list could also give you some ideas for how to go about diversifying your own portfolio.

View the Wealth shortlist


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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