Which Index is Right for Long-Term Investors?
If you've decided to start investing, you've probably come across two names again and again: the FTSE All-World Index and the S&P 500.
Both are popular choices with long-term investors, both are available through low-cost index funds and ETFs, and both have produced strong returns over long periods. However, they aren't the same thing, and understanding the differences can help you make a more informed decision.
In this guide, we'll look at what each index tracks, the advantages and disadvantages of both, and why many experienced investors choose one over the other.
The S&P 500 is an index that tracks approximately 500 of the largest publicly listed companies in the United States.
It includes many of the world's biggest household names, such as Apple, Microsoft, Amazon, Alphabet (Google), Meta, Nvidia and Berkshire Hathaway.
Although it only covers one country, the companies within the index operate globally, generating a significant proportion of their revenues outside the United States.
Because the S&P 500 focuses on large American companies, many investors see it as a simple way to invest in some of the world's strongest and most innovative businesses.
The FTSE All-World Index takes a much broader approach.
Rather than investing in a single country, it tracks thousands of companies across both developed and emerging markets around the world.
A typical FTSE All-World fund will include companies from:
Although the United States still represents the largest proportion of the index, you're also investing in businesses across Europe, Asia, the Pacific and emerging economies.
In effect, you're buying a small piece of the global economy.
The simplest way to think about it is this:
S&P 500 = Large American companies.
FTSE All-World = Thousands of companies from around the world. (Over 4000)
The S&P 500 is concentrated in one country.
The FTSE All-World is globally diversified.
Neither approach is inherently right or wrong. They simply represent different ways of investing.
One of the biggest advantages of the FTSE All-World Index is diversification.
By investing across dozens of countries and industries, you're not relying on the economic success of a single nation.
If one country experiences a difficult period, growth elsewhere may help offset those losses.
The S&P 500, by contrast, is entirely dependent on the performance of the United States.
That doesn't necessarily make it risky. The US has been one of the strongest-performing stock markets in history. However, it does mean your portfolio is more concentrated in one economy and one regulatory environment.
One reason the S&P 500 has become incredibly popular is its recent performance.
Over the past 15 years, American technology companies have delivered exceptional growth, helping the S&P 500 outperform many international markets.
Companies such as Apple, Microsoft, Nvidia and Amazon have become some of the most valuable businesses in history.
This naturally raises an important question, will that continue?
The honest answer is that nobody knows.
History has shown that leadership in global markets changes over time. There have been decades when Japan outperformed the United States, periods when emerging markets led the way and years when the UK market produced stronger returns than many expected.
Past performance can tell us what has happened.
It cannot tell us what will happen next.
Both indices can usually be tracked using very low-cost index funds and ETFs.
Annual fees are often below 0.25%, with some funds charging considerably less.
For long-term investors, keeping investment costs low can make a meaningful difference over several decades.
One difference that often surprises UK investors is currency exposure.
When you invest in the S&P 500, you're investing in companies whose shares are priced in US dollars.
A strengthening pound can reduce returns when converted back into sterling, while a weaker pound can increase them.
The FTSE All-World Index also contains currency risk, but because it invests across many countries and currencies, that exposure is naturally spread more widely.
The FTSE All-World Index is significantly more diversified.
Instead of around 500 companies in one country, you're investing in thousands of companies across developed and emerging markets.
For many investors, diversification is one of the biggest attractions of a global index fund.
People who prefer the S&P 500 often point to several advantages.
If you believe American businesses will continue to outperform the rest of the world, the S&P 500 may appeal to you.
Investors who choose a global index often take a different view.
Rather than trying to predict which country will perform best over the next twenty or thirty years, they simply invest in the whole world.
This approach reflects the philosophy that diversification reduces unnecessary risk and avoids having to make country-specific bets.
As markets change, the index naturally adjusts. Countries and companies that grow become a larger part of the index, while those that decline become a smaller part.
It's an approach that requires very little intervention from the investor.
Much of the Boglehead philosophy centres around diversification, simplicity and keeping costs low.
Many Boglehead investors favour globally diversified index funds because they avoid the need to predict which country will outperform in the future.
The philosophy is built on the idea that markets are incredibly difficult to beat consistently. Rather than trying to identify tomorrow's winning country or company, it's often simpler to own a broadly diversified portfolio and remain invested for the long term.
Both the FTSE All-World Index and the S&P 500 have helped millions of investors build long-term wealth.
The S&P 500 offers exposure to some of the world's largest and most successful companies, while the FTSE All-World Index provides much broader diversification across countries and regions.
Neither guarantees better future returns, and neither is immune from market downturns.
For many long-term investors, the decision comes down to a simple question.
Would you rather invest primarily in the United States, or would you prefer to own a small piece of businesses from all over the world?
Whichever approach you favour, the principles that matter most remain the same: invest regularly, keep costs low, stay diversified where appropriate and think in decades rather than months.
This article is for educational purposes only and does not constitute financial advice. Investments can fall as well as rise, and you may get back less than you invest. Past performance is not a reliable guide to future returns.