Some Stocks and Shares ISA investors choose to allocate their entire £20k annual limit to the FTSE 100. With its reputation for stability and an 8% average long-term return, this makes sense.
So, what if I’d done the same at the start of 2024? How much would I have so far this year?
The return
The iShares Core FTSE 100 UCITS ETF (LSE: ISF) is one of the most popular tracker funds in the UK. This exchange-traded fund (ETF) mimics the performance of the 100 largest firms on the London Stock Exchange.
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Since the turn of the year, this fund is up 6.4%. So I’d have £21,280 on paper. Not bad.
However, the Footsie is also known for its generous dividends. If we include those, the total return is 9.6%.
My hypothetical return year to date would be around £21,920.
How about the S&P 500?
Is that any good? I’d say it’s not bad, considering it’s above the long-term historical average.
Of course, the year isn’t over yet, so there’s time for it to pull back (or go higher). It’s a coin toss which way it’ll head, with optimism on interest rate cuts being tempered by rising geopolitical tensions and worries around a US recession.
One thing to note about the FTSE 100 is that it tends to lag the S&P 500. Year to date, the US’s blue-chip index is up around 21%, including dividends, largely due to surging artificial intelligence stocks.
Clearly, the S&P 500 is winning hands down again!
Valuation concerns
I don’t invest in index trackers. Instead, I pick individual US and UK shares to try and beat the market. While this approach is admittedly a bit riskier, it can also be more rewarding.
Right now though, US shares are highly valued. Indeed, the average S&P 500 stock trades for a price-to-earnings (P/E) multiple of about 28. This compares to a P/E ratio of just 13.5 for the FTSE 100.
Moreover, the S&P 500 offers a paltry 1.3% dividend yield versus a Footsie average of 3.5%.
Given this situation, I’d be very careful buying US-listed stocks right now. Many of my favourite holdings, including Shopify, Ferrari, and Intuitive Surgical, look overvalued.
This doesn’t mean I’ll sell them. But I won’t be investing more money at today’s pricey valuations.
A discounted hedge fund
However, a possible compromise might be found in Pershing Square Holdings (LSE: PSH). This is a FTSE 100-listed investment trust that holds predominantly US shares.
As of August, Pershing Square’s top positions were Universal Music Group, Hilton, Alphabet, and Chipotle Mexican Grill. These are top-notch companies with significant competitive advantages.
However, the portfolio only contains nine stocks! This high concentration makes it riskier than most other investment trusts.
The trust acts as an investment vehicle to access the high-conviction strategies of Bill Ackman’s hedge fund (Pershing Square Capital Management). He has a stellar track record, which has helped the FTSE 100 stock surge 137% over the past five years.
Yet the shares are trading at a huge 26% discount to the fund’s net asset value (NAV). In other words, I can invest in the stocks in Pershing’s portfolio for 26% less than their current market value, indicating great potential value.
I’d consider buying more shares with spare cash.
