The S&P 500‘s a collection of the largest 500 US companies by market capitalisation. Thanks in part to a high weighting of tech-based growth stocks, it’s delivered spectacular returns during the 21st century.
Since 1 January 2000, the index has risen a whopping 305% in value. That’s ahead of major UK indexes: the FTSE 250‘s up 215% over the same timeframe and the FTSE 100 sits way back with growth of ‘just’ 24%.
But the S&P faces challenges looking ahead. The threat of a US recession lingers, and much uncertainty surrounds the outcome of next week’s presidential election.
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It may also struggle to progress given the high valuations of many stocks, and especially those of the so-called Magnificent Seven (tech giants Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla).
That said, claims of excessive valuations aren’t new and haven’t hindered the S&P’s progress in recent decades. In fact, with inflation falling and interest rates following suit, the index could well pick up steam.
Strong return
Rate cuts from central banks including the Federal Reserve have already supercharged the S&P 500 this year. It’s up 23.2% since 1 January.
This means that £30,000 invested in an exchange-traded fund (ETF) like the HSBC S&P 500 ETF (LSE:HSPX) at the start of 2024 would have turned into £36,960. That’s just taking into account price appreciation and not dividend income.
Can the S&P continue rising strongly? I think so. The US economy’s tipped to keep growing at a steady clip. And a wide range of phenomena like artificial intelligence (AI), robotics, cybersecurity, and green technology could power the tech-heavy index’s earnings through the roof.
I opened a position in the HSBC S&P tracker fund at the start of the year. I also bought shares in the iShares S&P 500 Information Technology Sector ETF (LSE:IUIT) for more specific exposure to the US technology sector.
Here’s what I’m doing next
ETFs like this have advantages and disadvantages. They spread my capital across a large range of companies which, in turn, helps me to spread risk. However, they also mean I can make far less impressive returns than by buying individual shares.
Nvidia’s share price, for instance, has risen 193.4% so far in 2024. If I’d invested £30,000 here on 1 January, I’d be sitting on £88,020. That’s far higher than the £36,960 an S&P 500 tracker could’ve delivered.
My plan is to get the best of both worlds. So I aim to continue building my stake in the iShares S&P 500 Information Technology Sector ETF, which holds shares in 69 different businesses.
Since it started in 2015, the fund’s delivered an average annual return of 23.3%. This is thanks largely to the stunning performance of the Magnificent Seven.
In theory, the high valuations of many of these funds could limit further gains. Yet I’m optimistic the fund will keep soaring in value as rapid digitalisation rolls on across the globe.
