The FTSE 100 is the UK’s leading stock index, but it is not really representative of the UK economy.
More than 70% of the index’s profits are generated outside the country. I think this means it is more a barometer of global economic health.
As the global economy starts to rebuild after the pandemic, forecasts suggest that growth will accelerate over the next few years. And I think investing in the FTSE 100 is one of the best ways to play this trend.
FTSE 100 as an investment
Many investors might not consider the FTSE 100 index as an investment itself. However, in my opinion, it has many of the qualities of a globally diversified fund.
It includes 100 different companies, which are active in various sectors around the world. It offers an average dividend yield of around 3.5%, and investors can buy a low-cost FTSE 100 tracker fund for an annual management fee of as little as 0.1%.
I am more interested in the FTSE 100 today than I was a decade ago because the index’s composition has changed significantly.
Banks and mining companies used to dominate. Today pharmaceutical stocks make up the largest component, accounting for around 11% of the index.
The second-largest sector exposure is the consumer goods sector. Unilever and Diageo are the second and fourth-largest holdings in the index, respectively.
That being said, banks and oil and stocks still have a heavy weighting. These two sectors make up around 20% of the blue-chip index.
These sectors have underperformed over the past two years, but I think they could outperform as the economy begins to recover. Bank profits are already increasing as economic activity grows. Meanwhile, oil prices are back to pre-pandemic levels.
Oil companies are also investing heavily in expanding their presence in the renewable energy sector. As they continue down this path, I think they will attract green energy investors, who are usually prepared to pay a higher price for stocks.
This transition could take a couple of years, but I think it shows the index’s potential.
Risks to growth
I believe the outlook for many of the index’s constituents is improving. Still, I do not think it will be plain sailing for the next year or so.
As the pandemic continues to rumble on, many of the index’s constituents could continue to suffer disruption. This could undoubtedly hold back growth. Additional pandemic restrictions may also force companies to put their plans for expansion on ice and focus on survival.
I would be happy to buy the FTSE 100 as a recovery investment for my portfolio despite these risks. The diversification of the index, coupled with its global footprint, are desirable qualities.
The index also provides additional exposure to economically sensitive sectors, which could register faster growth as the economy recovers. Buying these stocks as part of a diverse portfolio, such as the FTSE 100, can reduce the risk of investing.
