If I had invested £10,000 in the S&P 500 five years ago, here's what I'd have now
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I S&P 500 you just burned. From a low of 3,583 just two years ago, the US blue-chip index has risen to 5,841 (as I write). That's an amazing 63% profit in just 24 months!
I would be over the moon to get that in one stock, regardless of the large cap index.
What's going on?
Several factors combined to produce this stellar performance, including the avoidance of a US recession and the expectation of lower interest rates.
However, the fuel in the fire was the rise of artificial intelligence (AI) following the launch of ChatGPT in November 2022. This created a wave of large costs from large cloud platforms, as they were afraid of being left behind in what could be a major technological revolution from the Internet.
A chip maker Nvidia was a big winner, with its share price up nearly 1,000% in two years. As one commentator put it last year: “There's a war going on out there in AI, and Nvidia is today the only weapon vendor.”
In September, it was reported that Nvidia alone accounted for nearly 25% of the S&P 500's year-to-date gains!
Perceived benefits
So, what if I had stuck with 10 grand in the S&P 500 index for the past five years? Well, I think it was a favorite Vanguard S&P 500 ETF (LSE: VUSA), then my return would have been about 108%. That has advantages.
So, I would have £20,800 (excluding fees), which would be an amazing return. However, it is worth remembering that this is significantly higher than the historical average of 10.7% per year.
A handful of giants
Given the speed of this rise, I think there are some things to consider. Many S&P 500 stocks are overvalued and could be due for a sharp pullback, especially if the upcoming US election ends in a contested outcome.
Also, there is a high level of concentration at the top of the index. Here are the 10 biggest holdings for the Vanguard ETF, as of September 30.
| A percentage of the fund | |
|---|---|
| an apple | 7.18% |
| Microsoft | 6.48% |
| Nvidia | 6.06% |
| Amazon | 3.53% |
| Meta Platforms | 2.54% |
| Alphabet (Class A) | 1.97% |
| Berkshire Hathaway | 1.71% |
| Alphabet (Class C) | 1.63% |
| Broadcom | 1.63% |
| Tesla | 1.47% |
The top 10 comprise about 34% of the total. This very high concentration is due to the large companies holding the index in their largest markets.
Where next?
Earlier this month, strategists at Goldman Sachs they raised their target on the index to 6,000 in December (2.7% higher). I note that this was their fourth extended adjustment since last year, so price predictions are always worth taking with a healthy bucket of salt, in my opinion.
However, it goes to show that most of Wall Street always has an end. Perhaps that's not surprising, given that the S&P 500 bull market typically runs for about five years, and we're just entering its current third year.
Of course, history is not a reliable indicator of the future.
My other choice
I do not have an S&P 500 ETF in my portfolio. If I wanted to invest in one though, I'd go for the equally weighted version that gets rebalanced.
This means that the fund assigns each stock the same weight, regardless of the size of the company, providing broad diversification and reducing concentration risk.
Another option would be iShares MSCI USA Quality Factor ETF. This focuses on a subset of high-quality US stocks with strong and stable earnings. Surprisingly, it has outperformed the S&P 500 in recent years!
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