FTSE 100 ETFs – passive funds which track the FTSE 100 index – are a popular investment among UK investors. That’s no surprise really, as an investment in a FTSE 100 ETF will get you exposure to the largest 100 companies in the UK at an extremely low cost, providing a solid core for an investment portfolio.
But is a FTSE 100 ETF on its own enough to be fully diversified? I’m not convinced it is. In my view, to be fully diversified, investors need to look outside the Footsie and ensure that they have exposure to other areas of the stock market, such as international shares and smaller companies. With that in mind, here’s a look at three ways investors can diversify outside the FTSE 100.
One of the easiest ways to diversify is to add international shares to your portfolio. With the UK stock market only accounting for around 4.5% of the total global stock market capitalisation, it makes sense to consider international investments, especially given that many of the biggest, most-powerful businesses in the world today such as Apple, Amazon and Google are based outside the UK.
One way to gain exposure to these kinds of companies is through an S&P 500 ETF such as the Vanguard S&P 500 UCITS ETF, which will track the largest 500 companies in the US. Through this kind of ETF, you will get exposure to a broad range of world-class companies, including the three names above and many other well-known names such as Microsoft, Visa, Coca-Cola Company, and Johnson & Johnson.
Another option to consider is a European-focused ETF such as the Vanguard FTSE Developed Europe ex UK ETF, which tracks an index of large and mid-cap stocks across Europe (excluding the UK). Top holdings in this specific ETF include the likes of Nestlé, Novartis, Roche, Total and SAP. There are many world-class companies in Europe, so a little bit of exposure to this region could be a sensible idea.
Another way to diversify outside the FTSE 100 is by investing in UK mid-cap stocks. These are companies that are smaller than those in the FTSE 100 (and often tend to grow a little faster). For exposure to mid-caps, a FTSE 250 ETF is a good place to start. This will get you exposure to the largest 250 stocks outside the FTSE 100, including names such as JD Sports Fashion, Just Eat, and Cineworld. Over the long run, the FTSE 250 has outperformed the FTSE 100 by a significant margin, meaning this kind of ETF could help boost your portfolio performance.
Finally, niche ETFs that focus on specific sectors or investment themes can also be a fantastic way to add diversification to a portfolio. For example, there are now ETFs that focus on growth markets such as healthcare, artificial intelligence, robotics, cybersecurity, and many more areas. If you’re bullish on a particular theme, it could make sense to identify an ETF that focuses on this theme and include it in your portfolio in an attempt to capitalise on the growth story.
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Edward Sheldon owns shares in Apple and Alphabet. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, and Apple. The Motley Fool UK owns shares of Johnson & Johnson, Microsoft, and Visa and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool UK has recommended Just Eat. 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.