Is Tracking The FTSE 100 Really The Best Idea?

Using an index fund to track the performance of the FTSE 100 has become an extremely popular way of investing over the past few years. This method of investing has even been advocated by the Oracle of Omaha, Warren Buffett, as it’s often the case that active asset managers fail to provide value for money.

Indeed, the majority of active mangers actually consistently underperform the market year after year. So using a low risk, low cost tracker fund way is often the best way to go.

However, while a tracker fund does provide a convenient way of tracking the market, the returns from this kind of strategy have been less than impressive over the past ten years.

Poor returns 

I have advocated using a tracker fund strategy myself several times in the past. And for the inexperienced investor, I still believe that it is the best way to invest. Nevertheless, for the average investor, with some experience, an active strategy may be more suitable as, including fees, over the past ten years the returns from a ‘tracking strategy’ have been less than impressive. 

For example, the HSBC FTSE 100 Index Fund Accumulation has achieved a total return of 6.6% per annum excluding fees over the past decade. The fund charges 0.2% per annum in fess. Similarly, the iShares FTSE 100 UCITS ETF has achieved a total return of 7% per annum over the past decade but fees will have taken 0.4% off this figure. Finally, the Liontrust FTSE 100 Tracker has achieved a total return of 6.6% per annum excluding fees over the past decade. The fund charges 0.5% per annum in fess.

But on top of annual fund management charges, platform charges also take a chunk out of returns. Specifically, Hargreaves Lansdown charges 0.45% per annum in management fees for funds, while TD Direct and Charles Stanley both charge 0.3% per year. 

So, after taking into account fees of around 1% per year, the average annual total return from a tracker fund over the past decade has been around 6% per annum.

After a quick look around, it’s easy to see that there are better opportunities out there. 

Better picks 

Financial data company, Morningstar provides some interesting figures regarding the total return of individual companies over the past decade. The total return figure includes reinvested dividends. 

At the top of the list is Unilever. Over the past ten years Unilever’s has produced a total return of 12.9% per annum, more than double the return achieved from a standard tracker fund including fees. Further, National Grid has achieved an average ten-year annual total return of 11.5%, once again nearly double the return of a FTSE 100 tracker over the same period.

Royal Dutch Shell has only achieved a lowly total return of 6.6%, although this return is still better than that of a standard FTSE 100 tracker after including fees. 

Now, you may be thinking that I've just cherry picked Unilever, National Grid and Shell as examples because their returns are better than average, but that's not the case. Indeed. Unilever has actually been picked by the Motley Fool's top analysts as one of the top five shares you should hold in your investment portfolio, due to the company's defensive nature and hefty dividend payout. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.