The Case For Buying A FTSE 100 And FTSE 250 Tracker Gets Even Stronger

More evidence to support the argument for tracking the FTSE 100 (INDEXFTSE:UKX) and FTSE 250 (INDEXFTSE:MCX).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Should you try and beat the market by buying an actively managed fund, or should you just buy the FTSE 100 and FTSE 250?

This is a question that’s been facing investors for some time, and has been labelled as “the great debate” by some analysts.

To solve the question, Jack Bogle — an index fund pioneer and founder of Vanguard — recently set out to prove that indexing is the best way to go for most investors with a series of charts. 

Bogle’s figures 

Bogle’s figures revealed that, thanks to fees and charges alone, the average actively managed US equity fund will underperform a standard, low-cost tracker fund by 2.64% per annum.

Now, an extra 2.64% per annum might not seem like much, but the additional returns really stack up.

Indeed, Bogle’s figures showed that over 50 years a $10,000 investment compounded at 6.64% per annum — the standard tracker return — would turn into $248,000. However, $10,000 compounded at just under 4% for 50 years — a return including active management fees — would turn into $70,387.

That means that due to excessive management charges, investors who put their money to work in actively managed funds would have lost out on $177,610 worth of gains over the period studied.

Slow and steady 

Other research also supports the argument for indexing. 

Over the past 29 years, the FTSE 100 has returned around 5.5% per annum, excluding dividends. Meanwhile, the FTSE 250 has outperformed its blue-chip peer by around 90% excluding dividends. And finally, the FTSE All-Share has returned closer to 6% per annum. Including dividends these returns would be closer to 10%. 

On the other hand, according to research conducted by a number of financial institutions, the average private investor has only returned 2.5% per annum including dividends. 

What’s more, with an estimated 80% of active fund managers failing to beat the market, it’s easy to conclude that tracker funds are the best way to go. 

Low-cost 

There are some very low-cost trackers out there for you to take advantage of. For example, the BlackRock 100 UK Equity Tracker, Fidelity Index UK and db x-trackers FTSE 100 UCITS ETF (LSE: XUKX) all charge a lowly 0.09% per annum in management fees.

For the FTSE 250, the iShares FTSE 250 UCITS ETF charges an annual management fee of 0.4% and the HSBC FTSE 250 Index fund charges around 0.3% per annum. 

Low-cost FTSE All-Share trackers include the Vanguard FTSE UK Equity Index, which charges 0.08%, Fidelity Index UK which offers index replication for 0.09% (0.07% if purchased through Fidelity) and the Legal & General Tracker Trust charges 0.10%.

The income problem 

Unfortunately, while index trackers may be a low-risk, low-cost way to grow your wealth over time, income investors are likely to be disappointed.

Indeed, the HSBC FTSE 250 tracker only offers a dividend yield of 2.2% and the BlackRock 100 UK Equity Tracker’s dividend yield stands at 2.6%. 

So, if you rely on your investments for additional income, then it could be sensible to buy a selection of dividend champions to sit in your portfolio alongside a low-cost tracker.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »