Right now, the outlook for equities is very uncertain. With this being case, I think an investment in the FTSE 100 is one of the best ways to protect your money.
So here are the five reasons why I’m buying the FTSE 100 for my portfolio today.
The biggest threat UK investors face over the next six months is Brexit. While politicians are working hard to achieve a satisfactory withdrawal agreement, there’s still a risk that we may leave the EU with no deal in place. If this does occur, then I believe equities with an international focus will outperform UK stocks.
The good news is the FTSE 100 is a global index. More than two-thirds of its profits come from outside the UK, making it the perfect Brexit hedge, in my opinion.
International diversification is a pulling point, but so is the FTSE 100’s exposure to the UK. UK stocks might not be in vogue right now, but if the outlook for the UK economy improves, buyers will return. And I think it will pay to have some exposure to the country if Brexit produces a positive result.
And if it doesn’t, the FTSE 100’s international exposure should limit losses. In other words, the FTSE 100 gives you the best of both worlds.
The third reason why I’m buying the FTSE 100 is that it offers a diversified, international income stream.
At the time of writing, the index supports an average dividend yield of 4.3%. As mentioned above, not only is this yield highly diversified, as it is an aggregation of the dividends of 100 companies, but with the bulk of the income supporting these payouts coming from overseas, it offers a certain degree of protection from Brexit as well.
According to various surveys, UK equities are the most hated by fund managers in the developed world right now. International investors have pulled tens of billions of dollars from UK equity funds since we voted to leave the EU, pushing valuations and stock prices down across the board.
This selling has sent valuations down to levels not seen for more than two-and-a-half decades. According to a recent article in the Financial Times, the UK stock market is currently trading on a price multiple of 12 times one-year forward earnings. That’s compared to a ratio of more than 20 for the S&P 500, the leading stock index in the US.
What’s more, the dividend yield on the FTSE All Share has jumped to 4.2%, and there’s only one occasion in the past 25 years were the yield has been higher: the 2007-2008 financial crisis.
Cheap as chips
The fifth reason why I am buying the FTSE 100 is that it’s cheap to do so.
Today, you can buy a FTSE 100 tracker fund for just 0.06% per annum in fees. I think this is a steal for a stream of international income. Further, buying a FTSE 100 fund involves almost no effort on your part. All we need to do is click a button, sit back and relax. Compared to managing a broad portfolio of income or growth stocks, a tracker fund is a much easier option in my view, and almost anyone can do it.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.