FTSE 100 tracker funds have become very popular recently. Proponents of these index trackers believe that they are a good way to get exposure to the stock market at a low cost.
But have FTSE 100 tracker funds actually been good investments in recent years? To answer this question, let’s look at how much £1,000 invested in a FTSE 100 tracker fund five years ago would be worth today.
Looking at the performance of the HSBC FTSE 100 Index (accumulation), this tracker fund has returned 30.3% over the last five years, according to Hargreaves Lansdown. Meanwhile, the Legal & General UK 100 Index Trust (accumulation) has returned 31.9% over five years, according to Hargreaves.
Taking the average return of these two index funds, you’re looking at a return of approximately 31% over five years. That means that had you invested £1,000 in a FTSE 100 tracker five years ago, your investment would have grown to around £1,310 today minus trading commissions and provider fees. That equates to an annualised gain of 5.55%.
Now, that’s a reasonable return. It’s certainly higher than the return you would have received if your money was parked in a cash savings account earning interest. But let’s be honest. It’s not a great return, is it? Compared to other investments, it’s a little underwhelming.
For example, had you invested £1,000 in an S&P 500 (the main US stock market index) tracker fund five years ago, that money would now be worth around £1,920, ignoring fees. Had you invested £1,000 in the actively-managed global equity fund Fundsmith five years ago, that capital would now be worth around £2,285, not counting fees. Or, had you put £1,000 into Boohoo shares five years ago, that money would now be worth around £6,666, ignoring fees. Looking at these kinds of returns, the FTSE 100’s five-year return is quite disappointing.
The problem with the FTSE 100
Why has the FTSE 100 generated such mediocre returns? It all comes down to the composition of the index. You see, the Footsie is filled with stocks in low-growth industries such as oil & gas, banking, and tobacco. These kinds of stocks aren’t growing much. For example, Royal Dutch Shell and HSBC haven’t lifted their dividends in years. It also has minimal exposure to the fast-growing technology sector. Ultimately, you really can’t expect high returns from this index given its composition.
How to generate higher returns
If you’re looking for higher returns from the stock market, I’d suggest doing three things:
Diversify internationally. Make sure you have exposure to top companies that are listed in the US and Europe.
Don’t ignore actively-managed funds. These kinds of funds are more expensive than trackers, but they can generate fantastic results. Fundsmith is certainly not the only actively-managed fund that could have doubled your money over the last five years.
Consider adding some individual stocks to your portfolio. Pick the right stocks, and you could really turbocharge your investment returns.
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Edward Sheldon owns shares in Hargreaves Lansdown, Boohoo Group, Royal Dutch Shell, and has a position in the Fundsmith Equity fund. The Motley Fool UK has recommended boohoo group, Hargreaves Lansdown, and HSBC Holdings. 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.