The FTSE 100 has underperformed the S&P 500 over the last five years. The UK index has fallen around 8.7% over that period, while the US index has rallied around 68%. The underperformance has continued in 2020, with the FTSE 100 down around 22% year-to-date and the S&P 500 up almost 8%.
Given that both indexes are made up of leading multinational companies, what explains the difference in performance? Here’s why I think the S&P 500 has outperformed and the adjustment I, as a long-term investor, should make to potentially retire faster.
Why the FTSE 100 has underperformed
I think one key reason the Footsie has underperformed over the past five years is that it isn’t as tech heavy as the S&P 500 is. While the US index has several notable big tech companies like Apple and Facebook, the FTSE 100’s tech companies, such as Sage Group and Experian, are a lot smaller.
The size difference of the leading companies means the difference in sector weighting for information technology is also particularly wide. Information technology made up 28.2% of the S&P 500 index as of 30 September 2020, but only 1.37% of the FTSE 100 index as of 30 June 2020, according to Siblis Research.
The information technology sector is benefiting from a number of long-term trends. These include the move to e-commerce, remote work (even before the pandemic), the need for cybersecurity, and so on. Pair that with strong execution from individual companies and shares of IT companies have done really well. The sector’s good performance along with its higher weighting has really helped the S&P 500.
How I’m adjusting for long-term investment
Although the stock prices of leading tech companies in the US are now considerably higher than they were five years ago, I think there’s still a lot of upside left in the big five tech stocks. Apple, Facebook, Alphabet, Amazon, and Microsoft collectively made up around 20% of the S&P 500’s total value in August.
I’m a long-term investor who can stand volatility, so I think having exposure to the big five US tech companies is potentially a better way to retire faster than owning just the FTSE 100.
While regulation could affect big tech in the US, the long-term outlook for technology as a whole is really good. The rate of technology advancement is increasing. Thanks to technology, companies can create lucrative markets in a short period of time. Some of those markets are also winner-take-all, providing even more benefits to leading tech companies. Each of the big five US tech companies have wide moats and excellent management.
Given the tech imbalance between the FTSE 100 and the S&P 500, I think it might be better to have a blend of both the FTSE 100 and the S&P 500, or even a blend of the FTSE 100 and the more tech heavy NASDAQ.
With a blend, I’d get both the ‘value’ of the FTSE 100 and the ‘growth’ potential of technology.
