Yield Gap UK: The Best-Performing Market in Our 20-Exchange Study (2000-2025)

title: "Yield Gap UK: The Best-Performing Market in Our 20-Exchange Study (2000-2025)" slug: yield-gap-uk-backtest publish_date: 2026-03-19 tags: [backtests, uk-markets, value-investing, earnings-yield, LSE] post_access: public excerpt: "We tested the yield gap strategy on London Stock Exchange stocks from 2000 to 2025. The UK delivered 11.29% CAGR vs 7.64% for SPY — the highest excess return across all 20 markets in our study, and +10.43% annually above the FTSE 100." authors: [Swas] feature_image: 1_uk_cumulative_growth.png feature_image_alt: "Growth of $10,000: Yield Gap UK vs FTSE 100 (2000-2025)"

Contents

1. The Strategy
2. Methodology
3. Results
4. What Drives the UK Outperformance
5. Why the UK Works for Value Investing
6. Run It Yourself
7. Limitations

Data: FMP financial data warehouse, 2000–2025. Updated March 2026.

We tested the yield gap strategy across 20 equity markets. The UK came first. London Stock Exchange stocks with earnings yields 3+ percentage points above UK gilt rates returned 11.29% CAGR from 2000 to 2025, vs 0.86% for the FTSE 100 (price return) and 7.64% for SPY. That's +10.43% above the local index, compounding over 25 years.

A $10,000 investment in January 2000 grew to $145,036. The same investment in SPY grew to $63,066. A FTSE 100 tracker grew to roughly $12,400 (price return only, ex-dividends).

The Strategy

The yield gap compares a stock's earnings yield (1/PE ratio) to the prevailing risk-free rate. For UK stocks, we use a 3.5% risk-free rate, reflecting the long-run average UK gilt yield. This sets the effective threshold at 6.5% earnings yield (PE < ~15.4x) — slightly more demanding than the 6% US threshold.

Signal: - Earnings yield > max(6%, rfr + 3%) = 6.5% for UK (PE < ~15.4x) - Earnings yield < 50% - ROE > 8% - D/E < 2.0

Portfolio construction: Top 30 by highest earnings yield, equal weight, annual January rebalance. Cash if fewer than 10 stocks qualify.

Methodology

• Universe: London Stock Exchange (LSE)
• Market cap filter: £500M+ at each rebalance date
• Data period: January 2000 through December 2025 (25 annual periods, 0 cash years)
• Rebalancing: Annual (January)
• Point-in-time data: FY filings with 45-day filing lag
• Transaction costs: Size-tiered model
• Benchmark: FTSE 100 (local UK benchmark, price return)
• Data source: Ceta Research FMP financial data warehouse

Full methodology at github.com/ceta-research/backtests/blob/main/METHODOLOGY.md.

Results

The down-capture of -2.4% vs FTSE 100 is the standout number. It means that when the FTSE fell, this portfolio on average rose slightly — effectively zero correlation with FTSE drawdowns. The 76% win rate (19 of 25 years beating FTSE) shows the consistency. The strategy beat the local index in most years because the FTSE 100 itself went essentially nowhere over this period.

Note: the FTSE 100 price return was only 0.86% annually from 2000-2025. With dividends reinvested, the total return index does considerably better. The comparison here is to the price-return benchmark that our backtest uses as the local index proxy.

UK value stocks have long had a reputation for being better priced than their US counterparts. The data supports that. The London market consistently produces pools of high-earnings-yield, quality companies — partly because UK investors have historically emphasized dividends and fundamental value over growth premiums.

Annual returns (portfolio vs FTSE 100):

What Drives the UK Outperformance

The dotcom bust gave UK value a massive head start. From 2000 to 2005, the UK portfolio delivered six years of strong returns while the FTSE 100 fell three consecutive years (2000: -7.37%, 2001: -15.49%, 2002: -23.16%). UK markets had limited exposure to late-1990s technology valuations. Earnings-yield investing in the UK during this period meant owning industrial, energy, and financial companies that simply kept earning.

2008 was different. The UK portfolio fell -34.75% in 2008 vs FTSE's -28.91% (-5.84% underperformance). The financial crisis hit UK banks and insurers hard. There was no defensive cushion in 2008. The recovery was strong: +47.08% in 2009 vs FTSE +20.57%.

2020 was the best single-year excess. During COVID, the FTSE 100 fell -13.58% while UK yield gap stocks returned +29.53% — a +43.11% excess. UK value stocks had sold off during the initial crash, then recovered sharply when markets recognized the businesses remained fundamentally intact.

2022 was the worst year. -24.64% vs FTSE +0.65% (-25.30% relative). UK financials and property companies — common in high-earnings-yield screens — suffered when rate rises hit valuations hard, while the FTSE 100's energy and mining weights cushioned the index.

2023 was a near-flat year. +0.15% vs FTSE +2.22% (-2.07% relative). Both the portfolio and FTSE underperformed SPY's +26% that year, driven by Magnificent Seven dominance in US markets.

Why the UK Works for Value Investing

The UK market has structural characteristics that favor earnings-yield strategies. The corporate culture emphasizes dividends over buybacks and growth reinvestment. Accounting standards and governance norms tend toward conservative financial reporting. The market has historically attracted investors who think in terms of yield and fundamental value rather than growth optionality.

This means high-earnings-yield UK stocks are often genuinely cheap — temporarily ignored by growth-oriented global capital flows — rather than cheap for structural reasons. The UK discount to global markets has been a recurring feature since 2016, and earnings-yield screens have harvested some of that discount consistently.

Run It Yourself

Current UK yield gap screen:

SELECT
    k.symbol,
    p.companyName,
    p.exchange,
    p.sector,
    ROUND(k.earningsYieldTTM * 100, 2) AS earnings_yield_pct,
    ROUND(1.0 / NULLIF(k.earningsYieldTTM, 0), 1) AS implied_pe,
    ROUND(k.returnOnEquityTTM * 100, 2) AS roe_pct,
    ROUND(fr.debtToEquityRatioTTM, 2) AS debt_to_equity,
    ROUND(k.freeCashFlowYieldTTM * 100, 2) AS fcf_yield_pct,
    ROUND(k.marketCap / 1e9, 2) AS mktcap_b
FROM key_metrics_ttm k
JOIN profile p ON k.symbol = p.symbol
JOIN financial_ratios_ttm fr ON k.symbol = fr.symbol
WHERE k.earningsYieldTTM > 0.065        -- EY > 6.5% (rfr=3.5%+3%)
  AND k.earningsYieldTTM < 0.50
  AND k.returnOnEquityTTM > 0.08
  AND (fr.debtToEquityRatioTTM IS NULL
       OR (fr.debtToEquityRatioTTM >= 0 AND fr.debtToEquityRatioTTM < 2.0))
  AND k.marketCap > 500000000           -- £500M+
  AND (p.industry IS NULL OR p.industry NOT LIKE 'Asset Management%')
  AND (p.industry IS NULL OR p.industry NOT LIKE 'Shell Companies%')
  AND p.exchange IN ('LSE')
ORDER BY k.earningsYieldTTM DESC
LIMIT 30

Run this query on Ceta Research Data Explorer

Full backtest:

git clone https://github.com/ceta-research/backtests.git
cd backtests
pip install -r requirements.txt
python3 yield-gap/backtest.py --preset uk --output results.json --verbose

Limitations

Currency risk not modeled: Returns are in local currency (GBP). A USD-based investor would face GBP/USD fluctuations on top of the equity returns. GBP weakened significantly after Brexit (2016) and during the 2022 Truss budget crisis — both periods would have reduced USD returns.

Small average portfolio: The strategy averaged 17.5 stocks when invested, below the 22-30 range of other markets. Concentration risk is higher. A single sector event (2008 financials) can dominate the portfolio.

Political and regulatory risk: UK markets carry Brexit-related risks, financial regulation changes, and tax policy uncertainty that don't appear in the backtest data.

Survivorship bias and FMP coverage: LSE coverage in FMP is broad but may underrepresent smaller companies that were acquired or delisted mid-period.

Data: Ceta Research (FMP financial data warehouse), January 2000 through December 2025. Full methodology: github.com/ceta-research/backtests/blob/main/METHODOLOGY.md.

Academic references: Campbell, J.Y. & Vuolteenaho, T. (2004). "Bad Beta, Good Beta." American Economic Review, 94(5). Damodaran, A. (2012). "Equity Risk Premiums (ERP): Determinants, Estimation and Implications." Stern School of Business.