It’s no secret that those wanting to build a decent nest egg but wary of trying to beat the market could do a lot worse than buy shares in a passive investment vehicle such as an index tracker or exchange-traded fund.
And while investing all your money in a single market isn’t advised, it’s perhaps only natural for UK retail investors to show a degree of home bias and favour investing in the FTSE 100 or FTSE 250, at least when starting out.
But which is likely to give better returns if I were to buy today? In order to answer that, we need to look at some basic facts.
Overseas earnings
The FTSE 100, of course, contains the biggest companies listed on the London Stock Exchange. Think Unilever, HSBC and Vodafone – businesses that just about everyone in the land recognises.
What those new to investing and the stock market may overlook, however, is that the vast majority of these companies make most of their cash overseas.
The fact that these earnings will be denominated in foreign currency is important since it means that these firms benefit from a fall in the value of sterling, which is exactly what has happened since the outcome of the referendum vote all the way back in 2016.
While many of the companies in the FTSE 250 will also have some of their earnings coming in from abroad, their success will depend to a greater extent on the health of the UK economy.
Go even further down the market food chain and you’ll find lots of firms whose ability to remain profitable depends entirely on what’s happening on these shores, hence why the last few years of political uncertainty have been particularly hard for some owners to stomach.
Brexit bounce?
Right now, it could be argued that any kind of resolution to the current impasse over Brexit, be it in the form of a no-deal, the acceptance of Theresa May’s request for an extension (which should be decided at some point today) or even the UK remaining in the EU permanently could see a bounce in UK stocks. As with most events, the market tends to dislike uncertainty more than a perceived ‘negative’ outcome.
While any plan for action could see a rise in both indexes, the FTSE 250 could benefit the most if whatever agreement is reached pleases the market. If the worst possible scenario plays out, the FTSE 100 could be the best (or at least more reliable) horse to back, at least in the short term.
That last bit is important. As long-term investors, we’re very much believers that it is time spent in the market rather than market timing that leads to wealth. As such, an investment in either index should do your wealth no harm at all if you buy and hold for years rather than months.
So how do you go about getting exposure to either index?
If you prefer the geographical diversification offered by the FTSE 100 then an investment in a cheap fund such as that offered by Blackrock is probably the best way forward. Its iShares Core FTSE 100 product has a total expense ratio of just 0.07% and yields 4.2%. Those interested in the FTSE 250 could go for Vanguard’s exchange-traded fund, which has an ongoing charge of only 0.1%.
