Why you should choose the S&P 500 over the FTSE 100

🔸 You might be tempted to invest in the FTSE but that would be a mistake — a lot of those companies cannot scale. 🔸

Hello! Here’s today’s two-minute guide to demystifying money and making you richer.

Yesterday’s markets:

• S&P 500: 4,723.77 ⬆️ 0.35%, ⬆️ 23.53% YTD

• FTSE 100: 7,648.98 ⬆️ 1.33%, ⬆️ 1.26%% YTD

• GBP to USD: $1.2769 ⬆️ 5.63% YTD

• GBP to EUR: €1.1611 ⬆️ 2.71% YTD

Photo: Giuseppe Milo

Why you should choose the S&P 500 over the FTSE 100

Well, well, well, stocks hit a new record! The S&P 500 hit 4735.75, up 0.4% and the FTSE 100 hit 7641.16 up 1.23%.

If you’re British you’re probably tempted to invest in a FTSE 100 exchange-traded fund (which tracks that stock index) because that’s the main listing for the UK’s largest public companies.

• But for most investors — those buying and holding for the long-term because they want to build wealth and secure their financial future — that would be a mistake.

In reality, the American S&P 500 is where you should put your money.

Here’s why:

As this chart shows, in the long run the S&P generally goes up and up and up, at about 6% or 7% per year. It’s up 2806% over the last 30 years. The FTSE did well — a 596% return isn’t bad! — but that’s less than a fifth of the growth the American stocks had. Here are the two indexes side by side:

That on its own ought to convince you that if you want long-term growth, buy an S&P 500 ETF.

But why do the US stocks perform so much better than the UK ones?

Tech stocks: The S&P also contains some of the most famous tech brands — Apple, Facebook, Microsoft, and so on. Tech companies are important because they can “scale” their revenues against their costs.

For example: When Facebook launches a new product, like Threads, the company only needs a small number of software engineers to keep the app running in comparison to the hundreds of millions of people using the app. Adding the next 100 million customers is relatively easy and Facebook doesn’t need to add a proportional number of employees to serve them.

The FTSE by contrast has very few tech companies and thus lacks that scaling ability. Instead, the FTSE is dominated by mining and construction companies. Endeavour Mining? Segro? Howden Joinery? We’ve never heard of them either! Crucially, these firms don’t scale. If you want to open a new mine, your costs will double: You’ll need to buy a second set of equipment and employ a second workforce comparable in size to Mine No.1. Your costs and revenues will go up in lockstep.

• That’s why the FTSE line on the chart is so much flatter than the S&P line — there are fewer companies in the FTSE that can scale their revenues vs their costs.

If you’re still feeling that it’s somehow wrong to invest in America rather than Britain, comfort yourself with this fact:

The S&P is a lot less ‘American’ than most people think

Big international companies tend to go public in New York rather than London because America has deeper pools of investors, and there is more money chasing those stocks. A lot of the companies in the S&P are technically British even though they are listed in New York. And because S&P companies tend to have customers all over the world, you’re getting a lot of exposure to international growth — not just US growth. Roughly half of the revenues for S&P 500 companies come from outside the US.

• That’s why our advice at Moneyin2 is always: Dump it into the S&P 500 and go to sleep. You’ll be fine.

And for dessert …

Above: Blackstone’s Christmas video.

• Tesco has recalled a turkey stuffing mix because it contains, er, moths. It’s “unfit for human consumption”, per the FSA.

• “Tipping backlash” under way. People are annoyed with those screens at the checkout that assume you’re going to tip 25%.

• Brentford FC might be worth £500 million, according to Bloomberg. The Premier League newbie team’s stadium only seats 17,250 people.

• Private investment bank Blackstone’s Christmas video contains a lot of jokes about Taylor Swift. And it’s … not terrible!

• The Bank of England held interest rates at 5.25%, again. The non-move was expected.

• UK economy shrank 0.3% in October. Yikes.

• Not going out-out: Brits have reduced their spending on nights on the town by 2.1% and “more than a third of UK nightclubs have closed down since June 2020,” according to City AM.

• A banker in Singapore complains that he’s poor because a BMW 5 series sedan now costs $373,000.