This paper examines the S&P 500® from the perspective of a UK-based investor. We examine:
- The concentration and sectoral makeup of the UK equity market, and the motivations for British market participants to diversify internationally;
- The role of the UK and the U.S. in the global economy and global equity markets;
- Potentially complementary aspects of an S&P 500-linked investment for a broad-based British equity portfolio denominated in British pound sterling (sterling); and
- The differences between the S&P 500 and other indices or active portfolios tracking U.S. equities.
Although this paper provides a perspective on the S&P 500 through the specific filter of an investor with an expected existing bias toward UK equities, many of our observations hold more generally for international investors considering U.S. equities.
Most market participants will have encountered the S&P 500; it is a widely referenced gauge of U.S. equity performance and a popular benchmark for investments. The S&P 500 contains many of the world’s largest and most recognizable companies, with a global reach of operations, customers, and revenue sources.
With the increasing popularity and scale of S&P 500-related products, such as exchange-traded funds (ETFs) and index funds, as well as the derivatives, such as futures and options, there has been a reduction in the typical cost and barriers to entry for S&P 500-linked investments.
For an investor predominantly invested in UK equities, U.S. stocks arise in several investment contexts. Most importantly, U.S. stocks represent a significant proportion of the global opportunity set for diversification. Even if geographic diversification is not a primary objective for the investor, a moderate allocation to U.S. equities might arise through a wish to access to the information technology sector, which is dominated by American brands. Or investors may look to U.S. equities in order to benefit from exposure to the U.S. dollar (dollar), which tends to increase during periods of financial crisis. As Exhibit 1 shows, U.S. equities may also be considered simply because of their absolute performance.
Exhibit 1 provides an example of the cumulative annualized total return and the return/risk ratio1 for various hypothetical combinations of the S&P 500 and S&P United Kingdom over various periods ending in July 2016.