The S&P 500 recently hit a technical correction, meaning it fell by 10%, and the US index is down 4.5% year to date. In contrast, the FTSE 100 has held up and has risen 6.3% at the time of writing (19 March).
The following chart shows how the indexes compare. The Vanguard S&P 500 UCITS ETF tracks the S&P 500, while the iShares Core FTSE 100 UCITS ETF (LSE: ISF) follows the FTSE 100. It seems the S&P 500 clearly had further to fall.
Bigger, biggest
The US index does include Apple, Microsoft, and Nvidia, three of the big AI-related stocks hit by the downturn. And even now, Nvidia alone is still worth a bit more than the entire FTSE 100.
The escalating US trade war with, well, just about everyone, doesn’t help. It does seem more likely to damage US companies than anyone else.
But there are other things that lead me to see the UK stock market as potentially more resilient. It’s mainly about valuation and volatility.
Higher, lower
The S&P 500 price-to-earnings (P/E) ratio is traditionally higher than the FTSE 100. Right now, we’re looking at a value of around 27 compared to approximately 18 — though they vary depending on who we ask. So there’s more valuation to lose.
And US stocks do tend to show a lot more volatility than in the UK. On the FTSE 100, it’s rare to see the biggest daily winners move more than 3% or 4%. But the S&P 500 leaderboard is regularly headed by 10%, 20%, or even bigger movements.
Lower overall valuations and generally smaller daily movements surely have to lower the risk of buying into a FTSE 100 index.
What to do?
That’s why I think something like the iShares Core FTSE 100 is an option that every stock market investor should consider. I think it can be an especially good choice for people just getting started. And for folks getting close to retiring.
A young person with their first Stocks and Shares ISA could be burned and put off for life if they pile into an individual stock and see it quickly fall. And those wanting regular retirement income will usually prefer to minimise their short-term risk.
The iShares Core FTSE 100 UCITS ETF has a complex name, but it really couldn’t be much simpler. The ‘ETF’ part of the name stands for ‘exchange-traded fund‘. And that just means we can buy shares in it directly, like any other stock.
The key difference is that it effectively spreads out our money to mimic the entire index. And that means we’re far less exposed to an individual stock crash, or something like the banking crisis, which hit a whole sector.
Bad spells
Even with the safety we get through diversification, we should still expect stock market falls from time to time.
But for someone starting their very first ISA, I really do think the iShares FTSE 100 tracker is a good one to consider. And maybe the Vanguard S&P 500 fund as a later pick, to get a taste of those growth stocks.
