January 24, 2021

Should I buy cheap UK shares or the America’s S&P 500?

Investors looking for cheap UK shares have plenty of options at present. However, over the past nine months, America’s S&P 500 index has yielded a much higher return for investors than UK equities. 

Following this performance, some investors might be wondering whether or not it’s worth buying the S&P 500 over cheap UK shares. Today, I’m going to explain which could be the best strategy for long-term investors. 

Buying cheap UK shares

One of the best ways to compare different stock markets around the world is to look at the average dividend yield offered.

For example, the FTSE All-Share currently supports an average dividend yield of 4.5%. This looks particularly attractive compared to the average dividend yield of 1.8% of the S&P 500. On this basis alone, it seems as if buying a basket of cheap UK shares could be the best option. 

But these figures don’t tell the whole story. The composition of the S&P 500 compared to the FTSE All-Share index is very different. America’s leading stock index has a more significant allocation towards technology stocks. Meanwhile, financial services and resource companies dominate the FTSE All-Share. 

This composition goes some way to explaining the difference in the performance of the two markets over the past nine months. The S&P 500 has outperformed the FTSE All-Share index by around 25% since the beginning of 2020. 

The portfolio approach 

The performance of the two indexes over the past nine months shows why it’s essential to own a diversified portfolio of stocks. While cheap UK shares might provide investors with a higher level of income than American equities, the allocation towards technology in the US has provided more capital growth over the past decade.

As such, the best option for investors may be to use a combination of both in their portfolios. If you’re looking for income, it may be sensible to have a higher allocation towards cheap UK stocks.

Meanwhile, if you’re looking for growth, a higher allocation towards the S&P 500, with its vast exposure to technology stocks, could be the best option. 

For investors concerned about buying overseas shares there’s no need to be concerned. Today, it’s relatively easy to gain exposure to US equities without having to do extra due diligence. Most brokers offer access to S&P 500 index tracker funds. This gives investors a very straightforward way to invest in the American stock market at the click of a button.

These tracker funds are only designed to match the performance of the index. So, there’s no additional research required to understand the investment approach used by managers. 

This may be one of the easiest and fastest ways to gain exposure to American stocks. At the same time, a portfolio of cheap UK shares could help improve your portfolios income stream. This approach would provide the best of both worlds. Capital growth and income. 

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Rupert Hargreaves owns no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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