Most active stock pickers fail to beat the FTSE 100. Trading mistakes, fees and a lack of diversification are factors that weigh on results.
However, there is a sure-fire way to beat the index, and it requires almost no effort whatsoever.
International index
The FTSE 100 is the UK’s leading index, but it’s not the index of the UK. Indeed, the FTSE 100 is an international index with many of the constituents based outside the UK. It’s estimated that 70% of the FTSE 100’s profits come from outside the UK.
So, when you buy the FTSE 100 as a whole, you’re placing a bet on international growth.
What’s more, the FTSE 100 is a market-cap weighted index. This means that the index’s largest constituents — HSBC, Royal Dutch Shell and BP — make more of difference to the index’s performance than smaller peers.
Unfortunately, a market cap weight index like the FTSE 100 can become extremely bias towards one sector during times of market excess.
In the late 90s, the FTSE 100 became a tech index, as the valuations of technology companies exploded, eclipsing the performance of other sectors.
Then again, during 2007 the banking sector took over the index. Ultimately, when both of these bubbles popped, the FTSE 100 couldn’t escape the turbulence.
A bigger index
The FTSE 250 is an index consisting of the 101st to the 350th largest companies listed on the London Stock Exchange, and, as a barometer of UK economic performance, is more accurate than the FTSE 100.
You see, the FTSE 250 is a UK index. Almost all of the companies listed on the index are UK born and bred. Moreover, due to the size and diversification of the FTSE 250, there’s less volatility for investors to deal with.
Stability
Over the past 16 years, the FTSE 250 has risen by over 230%, excluding dividends. However, over the same period the FTSE 100 has only gained a dismal 10.5%.
This poor performance is down to the index’s over-reliance on bubble sectors during the period, and lack of diversification.
So, if you’re looking for a way to beat the FTSE 100 year after year, the FTSE 250 is the way to go.
And one of the best ways to track the FTSE 250 is with the HSBC FTSE 250 Index fund.
Strong performance
The HSBC FTSE 250 Index fund, has returned an impressive 21.3% per annum since 2012. These are the kind of returns that even Warren Buffett would find hard to beat.
Over the past ten years, the fund has returned 12.3%, just by tracking the FTSE 250 index. The fund’s ongoing charge is 0.2% per annum.
Even the lowest cost FTSE 100 tracker cannot beat these returns. For example, the iShares FTSE 100 UCITS ETF, which only charges a paltry 0.1% annum in management fees, has produced an annualized return of 7.1% over the past ten years.
Other opportunities
All in all, if you want to consistently beat the FTSE 100 year after year, all you need to do is buy an FTSE 250 tracker fund.
