Passive investing has become very popular in recent years, and it’s easy to see why. All I have to do is buy a handful of exchange-traded funds (ETFs) that track specific indexes — the FTSE 100, for example — then sit back and let time do the rest.
One popular choice is the iShares Core FTSE 100 UCITS ETF (LSE: ISF). This seeks to mimic the performance of the UK’s blue-chip index. But what’s in the ETF exactly? And what are the weightings and top sectors? Let’s dive in.
A handful of giants from different sectors
While the fund is invested in 100 companies, bringing the benefits of diversification, it does have a fair bit of concentration at the top. As of 30 September, the five largest stocks by market cap — AstraZeneca, Shell, HSBC, Unilever, and RELX — accounted for just over 30% of the total.
This means that these giant companies will have an outsized effect on the performance of the FTSE 100 (and therefore the ETF). So to invest in the index, it would be wise if I was bullish on these stocks in particular.
Of course, that’s no different to the S&P 500. That index is dominated by gargantuan US tech firms like Apple, Nvidia, and Microsoft. In fact, stocks in the information technology sector account for around a third of the S&P 500.
By contrast, the FTSE 100 is much more balanced. The top five stocks are all from different sectors, namely healthcare, energy, financials, consumer staples, and technology (RELX is a data analytics firm).
What else is in there?
If we stay in the top 10, there’s spirits behemoth Diageo, which owns brands like Guinness, Smirnoff, Baileys, and Johnnie Walker.
Moving into the top 20, we find names like defence giant BAE Systems and engine maker Rolls-Royce (whose shares are up around 600% in two years). Other notable Footsie members include Glencore, the world’s largest miner by revenue, and Ashtead, the second-largest plant hire group in North America.
There are also a handful of world-class data firms, including RELX, credit bureau Experian, and London Stock Exchange Group. Each of these is leveraging AI and machine learning to enhance their core services, from improving decision-making to detecting fraud.
Beyond these, the index is a bit of a mixed bag, in my opinion. There are far too many cyclical stocks and not enough high-value tech firms. This largely explains why it’s returned just 33% (including dividends) in the past five years compared to the S&P 500’s 98% return.
My own approach
Due to this lack of tech exposure, there’s a risk the index could carry on underperforming in future. The rise of AI means we’re at the beginning of a “new industrial revolution“, according to Nvidia CEO Jensen Huang. Unfortunately, the FTSE 100 contains too many firms born during the last industrial revolution!
For me, I’d rather cherry-pick what I consider to be the best individual FTSE 100 stocks for my portfolio. And then add growth stocks listed across the pond to fill in the gaps.
Of course, this strategy does present a bit more risk than passive investing because I’m being selective. However, it’s one that’s proven to work for me so I’ll stick with it to help build wealth for retirement.
