Here’s Why I Would Avoid Investing In The FTSE 100

It’s well-known that many active investors fail to beat their benchmarks, like the FTSE 100 year after year. This trend has led many investors to buy low-cost FTSE 100 index trackers as an alternative to actively managed funds. 

Nevertheless, I believe that many UK investors are making a mistake by investing in the FTSE 100. You see, the FTSE 100 is an international index — it’s estimated that 70% of the FTSE 100’s profits come from outside the UK. 

So, when you buy the FTSE 100 as a whole, you’re placing a bet on international growth. What’ more, the FTSE 100’s top nine constituents account for nearly 40% of the index. 

With this being the case, the FTSE 100 index is hardly the best index to track. Indeed, for a play on UK economic growth the FTSE 250 is a better bet. And to profit from global economic growth, it could be better to track the S&P 500, STOXX 600 and MSCI World indexes. 

Diversification wins 

At its core, the FTSE 100 is an index made up of a few main holdings, including HSBCRoyal Dutch ShellVodafoneBPBritish American Tobacco, and GlaxoSmithKline. Such a concentrated portfolio may suit some investors, but it’s hardly a recipe for growth.   

For example, the FTSE 100 has returned 400% over the past three decades, a compound annual growth rate of around 5.6% per annum excluding dividends. However, over the same period the S&P 500 has returned 1080%, excluding dividends, a compound annual growth rate of 8.8% per annum. 

Similarly, during the past five years the STOXX 600 and MSCI World indexes have both outperformed the FTSE 100 by 22% and 64% respectively.

It’s pretty easy to see why these international indexes have been able to beat the FTSE 100 over the years. The FTSE 100 lacks diversification and as a result, the index is falling behind.

As their names suggest, the S&P 500 and STOXX 600 have 500 and 600 constituents respectively. The constituents are the largest companies in the world with household names such as Coca-ColaJohnson & JohnsonNestleApple and Google featuring in the top ten holdings. 

Further, as the STOXX 600 is designed to represent the 600 largest European companies, many of the index’s top constituents are also included in the FTSE 100. HSBC, Shell and BP are just three of the STOXX 600’s top 10 components. 

If you’re looking for even more diversification, the MSCI World index tracks the share price of more than 1,660 companies. The index has risen by around 7.1% per annum since 1994. 

Three top trackers

Replicating the performance of the STOXX 600, S&P 500 and MSCI World is just as easy as replicating the performance of the FTSE 100 — all you need to do is buy a low-cost tracker. 

There are plenty of low-cost trackers out there, but three of the best are the iShares STOXX Europe 600 UCITS ETF, which has a total expense ratio of 0.20%. The $160bn SPDR S&P 500 ETF Trust, which has a total expense ratio of 0.09%, and the MSCI World ETF, which has a total expense ratio of 0.24%.

Other opportunities 

It's not just other indexes that are making the FTSE 100 look bad. After a quick look around, it is easy to see that there are plenty of other, more lucrative opportunities out there. 

In particular, over the past ten years Unilever's shares have produced a total return of 8% per annum trouncing the FTSE 100. 

Now, you may be thinking that I've just cherry picked Unilever because the company's returns are better than average, but that's not the case.

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. 

And if you would like to uncover the other four stocks we believe should have a place in your investment portfolio, download our free report today!

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