Investing in the FTSE 100 is like embarking on a treasure hunt in the world of elite UK shares. The notion of this stock market index was birthed during Margaret Thatcher’s era, quickly establishing itself as a preeminent indicator of the UK stock market. Today, gaining exposure to the FTSE 100 through low-cost index funds is a common practice.
However, how does the FTSE 100 measure up against the S&P 500 in recent times? Should investors consider seeking individual stocks that have the potential to outpace the UK’s top benchmark? Let’s delve into this comparison between the two indices to gain insights into the world of stock investments.
Index returns
On May 14, 2019, a significant event marked the introduction of exchange-traded funds (ETFs) tracking the FTSE 100 and S&P 500 by Vanguard, a colossal asset management firm. With dividend reinvestments factored in, an investment of £10,000 in Vanguard’s FTSE 100 UCITS ETF (VUKE) at its inception would have grown to £15,065.21 today, reflecting a 50% gain.
However, the performance of Vanguard’s S&P 500 UCITS ETF (VESA) has overshadowed its UK counterpart, with a remarkable 133% rise during the same period. Investors who put their money in the US ETF would now possess £23,336, showcasing the power of substantial compound gains over time.
Winds of change?
Despite its strong dividend performance, the FTSE 100 lacks innovation in growth shares, particularly in the realm of technology. The UK index only allocates 1% to technology stocks in the ETF, significantly lower than the 32.5% allocation in Vanguard’s US tracker.
The US market has been driven by a tech boom, leading to a staggering bull run in American equities, while British stocks have struggled to keep pace with this dynamic landscape—a situation that poses a challenge for UK investors.
However, there is a silver lining for FTSE 100 enthusiasts. Vanguard projects an annualised return of 6.7% for UK shares over the next ten years, almost double the 3.9% anticipated for US stocks. The attractive valuations of British equities, characterized by a lower average price-to-earnings (P/E) ratio of 16.4 compared to 27.5 for the S&P 500, may help to mitigate the relative decline in the UK stock market.
A potential FTSE 100 gem
While index funds are a staple in most investment portfolios, the allure of individual FTSE 100 stocks cannot be overlooked, despite the higher risks attached. One such stock worth considering is 3i Group (LSE:III), a closed-ended investment fund that focuses on private equity and infrastructure.
The soaring trajectory of the 3i Group share price, climbing 316% in five years, can be largely attributed to a substantial investment in Dutch discount retailer Action, which comprises 70% of the company’s portfolio.
The exponential growth of Action is fueled by its aggressive expansion strategy beyond northern Europe and its low-cost business model, aiming to undercut supermarket competitors by maintaining minimal overhead costs. With 80% of products priced under €5, Action has fueled remarkable growth, reflecting the successful investment by 3i Group.
However, there are potential risks associated with 3i Group due to its heavy reliance on a single asset, Action. A slowdown in Action’s growth or a halt in new store openings could pose challenges for 3i Group.
In conclusion, while individual stock investments present higher risks, the potential returns, as seen in the case of 3i Group, can be substantial and worthy of consideration for investors aiming to outperform market indices.
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