How much is a £1,000 investment in a fund that looks to track the FTSE 100 index from five years ago worth today? The strange answer is: it depends.
The index as a whole is up 58% since October 2020. But investors who bought shares in FTSE 100 exchange-traded funds (ETFs) could have less than this – or a lot more.
What’s going on?
Vanguard – an investment firm that provides financial products – has more than one FTSE 100 ETF. One of them is up 88% in the last five years, while the other one is up just under 56%.
That’s a big difference, but there’s a very simple explanation for this and it’s not even to do with one being better than the other. It comes down to dividends and what they do with them.
One fund distributes the dividends it receives to investors as cash and the other reinvests them. Unsurprisingly, the one that’s up more is the one that retains the cash it receives.
Which one’s better though, might vary from one investor to another. Someone looking for passive income might prefer a distributing ETF while growth investors might favour accumulation.
Index composition
The FTSE 100’s a pretty diverse group of businesses. They’re all above a certain size and all listed in the UK, but they don’t have a huge amount in common beyond that.
While Rightmove’s largely focused on the UK, Experian generates most of its sales in the US. And where BP benefits from higher oil prices, this results in higher costs for the likes of easyJet.
The individual businesses that make up the index naturally have different capital allocation strategies. Some return cash to investors and others look to use it for future growth.
Compared to the S&P 500, the balance of the FTSE 100 is tilted more towards dividends. But that’s not to say the UK index doesn’t have names that growth investors should be interested in.
Growth investors take note…
Halma’s (LSE:HLMA) a terrific example. It’s a collection of businesses focused on life-saving technologies and a great illustration of how steady long-term growth can generate huge returns.
Over the last 10 years, revenues have grown at an average of 14.5% a year and earnings per share have almost tripled. That’s due to the company’s growth strategy, which has two parts to it.
The first involves acquiring businesses that have strong competitive positions in relatively small markets. This can be risky, especially as Halma gets bigger, but the second part helps mitigate this.
That second part involves integrating new subsidiaries into its existing network. This creates new avenues for growth and helps bring down costs, while also reducing the danger of overpaying.
UK growth
The difference between a distributing FTSE 100 ETF and an accumulating one shows how far the index is focused on dividends. But it also has some outstanding growth stocks.
Halma’s just one. Its ability to create growth opportunities for the businesses it acquires doesn’t entirely eliminate the risk inherent in buying them, but it does help the overall equation.
The stock’s up almost 400% in the last 10 years. But I still think it’s a name that investors looking to build long-term wealth should have on their radars.
