Why does the FTSE 100 constantly lag the S&P 500?
In the last decade, the FTSE 100 has risen by 3% and this has left many investors feeling somewhat disappointed with the performance of their portfolios. Clearly, the last 10 years have included a number of challenging economic events, including the credit crunch that caused a significant deterioration in investor sentiment in the FTSE 100, as well as in global stock markets.
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Furthermore, the FTSE 100 has had to deal with the recent commodity crisis that has severely hurt the share prices of a number of resources companies. And with the outlook for China and the global economy being somewhat uncertain, it's perhaps little wonder that the FTSE 100 has recorded such lacklustre performance.
However, the FTSE 100's performance in the last decade becomes much harder to reconcile when the capital gains of the S&P 500 are taken into account. The S&P 500 is approximately five times bigger than the FTSE 100, but unlike the Dow Jones it's weighted by market cap, which makes it a better comparator to the FTSE 100.
Outperformer
The S&P 500 has risen by 54% during the last 10 years and yet has had to endure the exact same challenges as the FTSE 100. The US economy was hit extremely hard by the credit crunch and while it's now on the road to recovery, it has also been hurt lately by the Federal Reserve's decision to begin raising interest rates.
Despite this, it has outperformed the FTSE 100 by over 50% in the last 10 years, with the story being the same when looking back even further to when the FTSE 100 was born. Since 1984, the S&P 500 has beaten the UK's leading index by a whopping 682%. This means that £1,000 invested in the S&P 500 in 1984 is now worth £12,400 while the same investment in the FTSE 100 is worth £5,580.
A key reason for the S&P 500's outperformance of the FTSE 100 is its valuation. The US stock market is simply much more expensive than the FTSE 100. For example, the S&P 500 has a price-to-earnings (P/E) ratio of 23.8 while the FTSE 100's P/E ratio stands at just 13.2. If the FTSE 100 was to have the same P/E ratio as the S&P 500 then it would be trading at over 11,000 points and its historic returns would have been much closer to those of its US peer.
Further evidence of the FTSE 100's low valuation can been seen in its yield, which currently stands at around 4%. The S&P 500's yield is currently just 2.2% and if the FTSE 100 was to have the same yield as the S&P 500 then it would be trading at just over 11,100 points. As a result of this, the FTSE 100 may have been a worse place to invest in the past, but could prove to be a far superior investment in the long run.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
