The FTSE 100 is the UK’s leading stock index. It comprises the 100 largest qualifying companies listed on the London Stock Exchange.
To qualify for inclusion, companies must meet several criteria. These include having a full listing on the London Stock Exchange with a sterling price, adherence to UK Corporate law and a minimum percentage of shares available for trading.
FTSE 100 companies are generally considered high-quality investments due to these requirements. What’s more, around 70% of the index’s profits come from outside the UK. So, this is more than just a UK index. These are some of the world’s best businesses at what they do.
And because the FTSE 100 is one of the world’s largest stock indexes, with a market capitalisation of nearly £2trn, investing in it is straightforward.
FTSE 100 costs
FTSE 100 tracker funds are designed to replicate the index with the lowest possible costs. The cheapest tracker on the market at the moment charges just 0.06% in annual management fees.
By comparison, the average actively managed investment fund charge is between 0.75% and 1.25% per annum. This difference in charges could have a big impact on returns in the long run.
For example, if I invested £1,000 in a low-cost tracker with an average annual management charge of 0.06%, and that tracker went on to return 5% a year for 10 years, I would end up paying £9 in fees.
However, if I made the same investment in an active fund with an annual management charge of 1%, I would end up paying £150 in fees over the space of a decade.
That said, it’s not all about fees. Actively managed funds can charge more because they spend more time trying to pick stocks. This can lead to market-beating performance.
So, it might be worth paying the extra money in some cases. Other funds also offer exposure to different investment themes and assets, which can help provide diversification for a portfolio. That’s why I wouldn’t write off active funds entirely just because they are a bit more expensive.
Diversification is key
Still, I believe buying a FTSE 100 tracker is a great way to gain exposure to 100 of the world’s largest companies quickly and cost-effectively. But I don’t think the index is a one-stop-shop. It is mostly made up of large corporations, which don’t tend to grow as fast as they’re smaller peers.
This is not always correct, but the law of large numbers can act as a sticking point for growth. A business with sales of £10bn, for example, is unlikely to be able to drive revenue growth of 100% in a year. However, a company with sales of £10m may achieve that sort of growth.
There’s also some risk as the FTSE 100 has limited exposure to technology companies, which have registered faster growth recently. This has held back the index’s performance in comparison to other investments. Still, past performance is no guarantee of future returns. So, this may or may not continue to be a headwind in future.
Therefore, while I think that the FTSE 100 is a great way to invest in some of the world’s largest companies, I would only devote a portion of my portfolio to this investment. Other stocks, shares and funds may offer access to different sectors and industries, providing more diversification. All in all, I would only own the index as part of a diversified portfolio.
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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.