If I’d invested £10,000 in the S&P 500 five years ago, here’s what I’d have now

This writer takes a look at the impressive gains that investors have enjoyed thanks to the S&P 500’s remarkable five-year showing.

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The S&P 500 has been on fire lately. From a low of 3,583 just two years ago, the US blue-chip index has surged to 5,841 (as I write). That’s a mind-boggling gain of 63% in just 24 months!

I’d be over the moon to get that from a single stock, never mind a large-cap index.

What’s going on?

A number of factors have come together to produce this stellar performance, including the avoidance of a US recession and the anticipation of falling interest rates.

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However, the fuel on the fire has been the rise of generative artificial intelligence (AI) following the launch of ChatGPT in November 2022. This triggered a tidal wave of capital expenditure from the giant cloud platforms, as they feared being left behind in potentially the biggest tech revolution since the internet.

Chipmaker Nvidia has been the big winner, with its share price rocketing around 1,000% in two years. As one analyst put it last year: “There’s a war going on out there in AI, and Nvidia today is the only arms dealer.”

In September, it was reported that Nvidia alone had accounted for approximately 25% of the S&P 500’s year-to-date gains!

Created with Highcharts 11.4.3Nvidia PriceZoom1M3M6MYTD1Y5Y10YALL20 Oct 201920 Oct 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

The hypothetical gains

So, what if I’d stuck 10 grand into the S&P 500 index five years ago? Well, assuming it was the popular Vanguard S&P 500 ETF (LSE: VUSA), then my return would have been around 108%. That’s with dividends.

So, I’d have £20,800 (not including fees), which would be an incredible return. However, it’s worth remembering this is well above the historical average of around 10.7% per year.

Created with Highcharts 11.4.3Vanguard Funds Public - Vanguard S&P 500 Ucits ETF PriceZoom1M3M6MYTD1Y5Y10YALL20 Oct 201920 Oct 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

A handful of giants

Given the speed of this rise, I think there are things to consider. Many S&P 500 stocks are pricey and could be due for a sharp pullback, particularly if the forthcoming US election ends in a contested outcome.

Plus, there’s a high level of concentration at the top of the index. Here are the Vanguard ETF’s 10 largest holdings, as of 30 September.

Percentage of fund
Apple7.18%
Microsoft 6.48%
Nvidia6.06%
Amazon3.53%
Meta Platforms 2.54%
Alphabet (Class A)1.97%
Berkshire Hathaway 1.71%
Alphabet (Class C)1.63%
Broadcom 1.63%
Tesla 1.47%

The top 10 comprise around 34% of the total. This very high concentration is due to the largest companies dominating the index with their mammoth market caps.

Where next?

Earlier this month, strategists at Goldman Sachs raised their target on the index to 6,000 by December (2.7% higher). I note this was their fourth increased adjustment since last year, so price forecasts are always worth taking with a healthy bucket of salt, in my opinion.

However, it does indicate that most of Wall Street remains upbeat. Perhaps that’s not surprising, given that the average S&P 500 bull market has tended to run for around five years, and we’ve only just entered the third year of the current one.

Of course, history’s no reliable indicator of what’s to come.

My preferred alternatives

I don’t have an S&P 500 ETF in my portfolio. If I wanted to invest in one though, I’d probably go for an equal-weighted version that gets regularly rebalanced.

This means the fund allocates the same weight to each stock, regardless of company size, providing broader diversification and reducing concentration risk.

Another option could be the iShares MSCI USA Quality Factor ETF. This focuses on a sub-set of high-quality US stocks with strong and stable earnings. Incredibly, it’s even outperformed the S&P 500 in recent years!

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This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. Views expressed on the companies mentioned in this article are those of the writer 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 diverse range of insights makes us better investors.

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