An update on a strategy to exploit the monthly comparative returns of the FTSE 100 and S&P 500 indices.
Although since 1984 the S&P 500 has greatly out-performed the FTSE 100, there are months in the year when the FTSE 100 fairly consistently out-performs the S&P 500.
The following chart shows the average monthly out-performance of the FTSE 100 Index over the S&P 500 Index since 1984.
Looking first at the orange bars in the chart, this shows, for example, that on average in January the FTSE 100 has out-performed the S&P 500 by -0.3 percentage points (i.e. the UK index has under-performed the US index in January). From the chart we can see that the five months that are relatively strong for the FTSE 100 are: February, April, July, August and December. For example, the FTSE 100 has out-performed the S&P 500 in February in 13 of the past 15 years.
Now, turning to the dark green bars, these display the same average monthly out-performance of the FTSE 100 over the S&P 500, except this time the S&P 500 Index has been sterling-adjusted. One effect of adjusting for currency moves is to amplify the out-performance of the FTSE 100 index in certain months (April, July, and December). Conversely, the FTSE 100 under-performance is amplified in January, May and November.
Whereas, before, the relatively strong FTSE 100 months were February, April, July, August and December, we can see that the currency-adjusted strong months are just April, July, and December.
The FTSE 100/S&P 500 monthly switching strategy (FSMSP)
The above analysis suggests a strategy of investing in the U.K. market (i.e. the FTSE 100 Index) in the months April, July and December and in the U.S. market (i.e. the S&P 500 Index) for the rest of the year. In other words, the portfolio would be invested in the S&P 500 from January to March, then at the end of March it switches out of the S&P500 into the FTSE 100 for one month, then back into the S&P 500 for two months, into the FTSE 100 for July, back into the S&P 500 for four months, then back into the FTSE 100 for December, and finally back into the S&P 500 to start the next year.
The following chart shows the result of operating such a strategy from 2000 to 2017. For comparison, the chart also includes the portfolio returns from continuous investments in the FTSE 100 and S&P 500 (in GB pounds).
The final result: since 2000 the FTSE 100 portfolio would have grown 19%, the S&P 500(£) risen 120%, but the FTSE 100/S&P 500 monthly switching portfolio (FSMSP) would have increased 278%. Switching six times a year would have incurred transaction costs, but these would not have dented performance significantly.
In the last year (since the previous edition of the Almanac), the portfolio would have gained 18%, compared with gains of 10% and 14% respectively for the FTSE 100 and S&P 500 Indices. So, for the moment, this strategy still seems to be working well.
The above is an extract from the newly published UK Stock Market Almanac 2018.