FTSE 100 tracker funds? I think this is a smarter way to invest

FTSE 100 tracker funds are popular because they offer diversified exposure to the stock market at a low cost. Are there better ways to invest though?

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FTSE 100 tracker or ‘index’ funds are popular in the UK. This is because they offer diversified exposure to the stock market at a very low cost.

Footsie trackers definitely have their advantages. However, I think there are better ways for me to invest. Here I’ll highlight why and I’ll also explain how I invest in shares.

FTSE 100 tracker funds: 3 things to know

FTSE 100 tracker funds are good for instant diversification and for those who don’t want to think too much about their investments. But one major disadvantage is that they only contain exposure to UK-listed companies.

The UK stock market has many world-class businesses. Unilever and Diageo are good examples. A FTSE 100 tracker has exposure to both of these. However, a lot of other top companies are listed internationally. Amazon and Nike, for example, are listed in the US. This means they’re not part of a Footsie tracker.

With so many top companies listed overseas, I think it’s smart to take a global approach to investing.

Minimal technology exposure

Another weakness of FTSE 100 tracker funds is that they don’t have much exposure to the technology sector.

There are a few technology players in the FTSE 100. Companies such as Experian, Rightmove, and Sage are some examples. But the Footsie does haven’t any tech powerhouses such as Apple, Alphabet (Google), and Microsoft. Again, these are all listed in the US.

Given that we’re in the midst of a digital revolution right now, I think it’s a good idea to have a significant amount of exposure to the technology sector.

Large companies only

A third issue with tracker funds is that they only contain exposure to large companies.

The problem here is that many of these large companies are not growing much. FTSE 100 companies such as Shell, BT, and Vodafone are all struggling for growth. This is reflected in the performance of FTSE 100 index funds. Over the last three years, they have delivered negative returns.

The UK has plenty of exciting, high-growth companies. But most are quite small. This means they’re not part of a FTSE 100 tracker. 

How I’m investing today

Instead of a FTSE 100 tracker fund, I think it’s a better idea for me as an active investor to put together a customised portfolio of individual stocks. This is how I invest my own money. This approach is more work than buying an index fund, sure. However, the financial rewards are potentially much greater.

My portfolio consists of three main types of stocks:

  • Large-cap growth stocks such as Apple, Microsoft, and Alphabet. I believe these stocks are poised for strong long-term growth in today’s digital world. Apple, for example, which is Warren Buffett’s top stock, has plans to dominate healthcare.

  • FTSE 100 dividend stocks such as Unilever, Diageo, and Reckitt Benckiser. These kinds of stocks aren’t as exciting as my growth stocks. However, they are reliable performers, which means they provide portfolio stability. They also provide passive income, which is nice.

  • Small-cap growth stocks for more explosive growth. Some of my holdings here include video game specialist Keywords Studios (up 50% in a year), logistics company Clipper Logistics (up 70% in a year) and US-listed freelance platform operator Upwork (up 200% in a year). 

I believe that this approach is likely to generate much higher returns for me than a FTSE 100 tracker over the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Apple, Alphabet, Microsoft, Royal Dutch Shell, Reckitt Benckiser, Unilever, Diageo, Rightmove, Sage, Clipper Logistics, Amazon, Keywords Studios, and Upwork. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Apple, Microsoft, and Nike. The Motley Fool UK has recommended Clipper Logistics, Diageo, Experian, Keywords Studios, Rightmove, Sage Group, and Unilever and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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