When it comes to UK stock market indexes, it’s the FTSE 100 that gets all the attention. This is the index you hear about the most in the media. Yet interestingly, the index that most UK fund managers use as a benchmark is the broader FTSE All-Share index. This is considered to be the best performance measure of the UK stock market.
Is the FTSE All-Share a better investment than the FTSE 100 if you’re looking to invest through an index fund? Let’s take a look at the structure of this UK stock market index.
The FTSE All-Share: a superior index?
There are several key differences between the two indexes.
The first notable difference is the number of constituents in each index. Whereas the FTSE 100 only contains 100 companies, the All-Share contains about 600. This means it’s far more diversified. It captures 98% of the UK’s market capitalisation.
The second big difference between the two indexes is that the All-Share has exposure to companies of all sizes while the FTSE 100 only has exposure to large-cap companies. At 31 July 2020, the average market cap of companies in the All-Share was £3bn. By contrast, the average market cap of the FTSE 100 was £15bn. This is a key advantage of the All-Share. If you invest in this index, you get exposure to higher-growth mid-caps and small-caps.
A third difference is the geographic mix of revenues streams. Nearly all of the companies in the FTSE 100 generate revenues globally. Yet in the FTSE All-Share, there are plenty of UK-focused businesses. This can be an advantage if the UK economy is strong. However, it can also be a disadvantage if the UK economy is weak.
Stronger performance
Looking at recent performance, the FTSE All-Share index has outperformed the FTSE 100.
For the five-year period to the end of July 2020, the All-Share delivered a return of 8.4% per year. By contrast, the FTSE 100 generated a return of 7.7%. That’s a significant outperformance. And it generated this outperformance without a notable increase in volatility.
Meanwhile, between 2010 and 2019, the FTSE All-Share delivered a return roughly 14% higher than the FTSE 100.
Putting this all together, my view is that the FTSE All-Share index is superior to the FTSE 100. Not only is it more diversified but it also has higher growth potential.
Beat the FTSE All-Share
That said, if you’re building a share portfolio and looking to generate strong returns, I think you can do better than a FTSE All-Share tracker fund. While this index has some attractive features, it also has some flaws.
For example, like the FTSE 100, the FTSE All-Share has significant exposure to sectors that are experiencing structural challenges such as oil & gas, banking, and tobacco. This could limit growth going forward. The FTSE All-Share also has very little exposure to the technology sector (just 1.2% at 31 July 2020).
In my view, if you take a more active approach to investing, there’s a good chance you could outperform the FTSE All-Share index. Get on to a growth stock such as Rightmove (up 900% in 10 years) or Ocado (up 600% in five years), or an investment trust such as Scottish Mortgage (up 270% in three years) early, and you could see much higher returns.
This approach to investing is more work than investing in an index tracker fund, sure. But the financial rewards can be much greater.
