Is a FTSE 100 tracker fund a good investment for an ISA this year?

FTSE 100 tracker funds have delivered underwhelming returns over the last decade. Is there a better option for long-term investors?

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The UK’s FTSE 100 index has had a good run recently. Last month, for example, it jumped about 4.2%.

Is a Footsie tracker fund like the iShares Core FTSE 100 UCITS ETF (Acc) (LSE: CUKX) a good investment for my ISA though? Let’s discuss.

10-year performance

There are many companies in the FTSE 100 that have generated excellent long-term returns for investors.

From technology companies like Sage and RELX to financial companies like London Stock Exchange Group and 3i Group, there have been some big winners.

However, as a whole, the index hasn’t been a brilliant investment in recent decades.

Looking at the performance of the iShares Core FTSE 100 UCITS ETF, for the 10-year period to the end of March, it only returned 75%.

That’s only about 5.8% a year on an annualised basis, which is not a great return when one considers the risks (volatility) associated with investing in the stock market.

Of course, 5.8% a year isn’t terrible. It’s a better return that savings accounts would have delivered over the period (for a large part of that period, savings accounts were paying 1% max).

However, over that period, other kinds of tracker funds have delivered much higher returns. For example, the iShares Core MSCI World UCITS ETF (Acc), which provides exposure to companies in 23 different countries (including the UK), returned 148% over the same period – roughly twice the figure of the FTSE 100 product.

That equates to an annualised gain of 9.5%, which is a much better performance, and the kind of return expected from the stock market over the long term.

UK versus global

Now looking ahead, we could see an improvement in the performance of the FTSE 100 as a lot of Footsie stocks are trading cheaply right now.

But I’d be surprised if a Footsie tracker was able to outperform a global tracker over the next decade.

That’s because, unfortunately, the FTSE 100 is home to a lot of slow-moving businesses that are facing structural challenges (eg oil companies, tobacco businesses) and weighing the index down.

By contrast, a global tracker has significant exposure to technology companies like Apple and Microsoft which, to my mind, are poised to do well in an increasingly digital world.

Apple shares, for the record, have returned about 25% a year over the last decade.

My strategy

So personally, I don’t think a FTSE 100 tracker fund’s a great investment for my portfolio today.

Ultimately, I feel that long-term investors like myself can do better than these products.

Instead of just owning a UK tracker fund, I think I’m better off building a portfolio of global funds and then adding some high-quality stocks like Apple on top (The Motley Fool can be a great source of stock ideas).

By taking a more diversified – and adventurous – approach to investing, I reckon I can give myself a better chance of financial success.

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 has positions in Apple, London Stock Exchange Group Plc, Microsoft, and Sage Group Plc. The Motley Fool UK has recommended Apple, Microsoft, RELX, and Sage Group Plc. 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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