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I have a balanced diversified portfolio. However, my Stocks and Shares ISA portfolio is heavily skewed towards UK stocks. Luckily, I see the major UK indices (FTSE 100) as a global equity stock exchange. Its constituents have internationally diverse sources of income. Still, more global stock diversification wouldn’t go wrong with me right now.
My urgency has increased after getting some compelling data. The data showed the performance of S&P 500 Has comfortably trounced the FTSE 100 and other major world markets since the turn of the century.
Is there a US market premium?
I have no doubt that supporting the US market since the millennium would have been a smart investment decision on my part.
The index is a fundamentally better choice for me than the FTSE 100. First, the S&P 500 is much less concentrated than the FTSE 100. As the name implies, the S&P 500 tracks a much larger number of companies than the FTSE 100. Thus it is a more diversified stock universe. Additionally, the largest market cap companies have a greater influence on the FTSE 100 than in the past. For example, the top 10 stocks in the S&P 500 make up about 30% of the index. Meanwhile, when you look at the FTSE 100, that number jumps to 40%.
superhero of the century
Among the major blue-chip indices, the S&P 500 has certainly outperformed. However, I note that even better returns are available much closer to home. I was surprised to learn that the more junior FTSE 250 index – which tracks mid-sized companies in the UK – has also strongly outperformed the S&P 500 since the turn of the century. The S&P 500 has given annual returns of about 6% since 2000. But FTSE 250 has given 7% return!
The risk to me when investing in mid-cap UK companies is that they are more linked to the UK economy than blue-chip stocks.
However, I believe this trend is changing. These days, half of the earnings of FTSE 250 companies come from overseas, compared to more than three quarters for the FTSE 100, according to FTSE Russell. Certainly, I believe that the FTSE 250 is becoming more diversified over time.
Consider a range of stock markets
Clearly, mid-sized companies offer me greater growth potential than blue-chip stocks on major indices such as the FTSE 100 and S&P 500. bit decades. Granted, this outperformance has come with a more rockier and volatile journey versus blue-chip indexes. But without risk there is no reward.
Of course past performance is not an indicator of future performance. But the important point here for me is that all the major stock markets I mentioned, whether in the US or the UK, have grown since the turn of the century.
Global diversification is an important element of my investment approach. If I pick the best companies from each of these stock markets, I can reap serious rewards.
Which has the best stock market returns: FTSE 100 or S&P 500? First appeared in The Motley Fool UK.
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The views expressed on the companies mentioned in this article are those of the author 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 wide variety of insights makes us better investors.
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