Why the FTSE 100 could be a better buy than any investment trust

The FTSE 100 (INDEXFTSE: UKX) offers income and growth at a fraction of the cost of investment trusts.

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.

Investment trusts are a great asset to use to invest for the future. These instruments, which are structured as companies, have been around in one form or another for hundreds of years, allowing generations to build wealth and invest with ease. 

One of the key benefits of investment trusts is that they can invest in instruments that are not available to most investors. Some own airplanes they lease to airlines, while others invest in secured and unsecured loans to generate an above average income for shareholders. 

Some also offer UK investors exposure to overseas investments, which they may not be able to get access to themselves. The Scottish Mortage Investment Trust, for example, owns shares in retail giant Amazon

Should you invest £1,000 in Auto Trader Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Auto Trader Group Plc made the list?

See the 6 stocks

However, while some investment trusts are attractive due to their exotic exposures, others do not have similar qualities. 

Unfortunately, a number of investment trusts, particularly income trusts, own a portfolio that’s broadly similar to the FTSE 100. And while these trusts may offer higher dividend yields, thanks to overweight allocations to the market’s highest-yielding stocks, their fees eat up all of the additional income. 

A better buy 

The FTSE 100 is the UK’s leading stock index, and it’s also a great income investment. At the time of writing, the index supports a dividend yield of 3.9%, many times the average interest rate offered on most high street banks’ savings accounts today. With this ready-made portfolio of 100 of the biggest companies in the world, it’s difficult to see why investors would look anywhere else for income. 

Granted, there are funds out there that offer higher dividend yields. For example, the Shires Income plc and Murray Income trusts yield 4.7% and 4.2% respectively, but after you deduct fees, the returns on offer look less appealing. 

Counting costs

The iShares 100 UK Equity Index Fund, which tracks the FTSE 100, charges only 0.07% per year, with no initial fees for investors. This means that after deducting fees, investors can look forward to an annual return equivalent to 3.8% from the FTSE 100 excluding capital gains. For the sake of simplicity, I’m going to assume that the returns from this index tracker and trusts are limited to just income to make the impact of fees more apparent. 

On the other hand, while Murray and Shires might look more attractive on a yield basis initially, I believe that the fees charged level the playing field. Shires charges a little over 1% per annum in fees, bringing the annual return down to 3.7%. Meanwhile, Murray charges a total of 0.8% bringing the total return down to 3.4%. 

I believe that these figures clearly show that as an income play, the FTSE 100 is a much better buy than investment trusts. Trusts might look as if they offer better income potential at first glance, but after deducting fees, investors might be better off. 

These numbers exclude capital gains, which could turn the tables back in the trusts’ favour. However, with investment trusts you’re relying on the skill of the manager to keep outperforming. With the FTSE 100, there’s no such risk so you won’t end up overpaying for lacklustre returns. 

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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 does not own any 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.

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

I asked ChatGPT for the best UK stocks to buy for my portfolio in the market sell-off. Here’s what it said

When Edward Sheldon asked the generative AI app for the best stocks to buy amid the market pullback, he was…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Could now be a rewarding moment to buy shares?

Christopher Ruane's looking for shares to buy in a turbulent market. But while he's focused on quality, he's equally interested…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How much would we need in a Stocks and Shares ISA for £10,000-a-year passive income?

We're still in the first month of the new 2025/26 ISA season, and that means a lot of investors are…

Read more »

Dividend Shares

2 brilliant stocks currently on sale that can help to build a second income

Jon Smith outlines two stocks with dividend yields in excess of 6% that could be a smart purchase for investors…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Warren Buffett ‘bought American’. Should investors consider the same in an unstable market environment?

During the 2008 financial crisis, Warren Buffett doubled down on his commitment to American stocks. Our writer revisits that strategy…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

£10,000 invested in Glencore shares 5 years ago is now worth…

Glencore shares have been on a wild ride, but long-term shareholders are sitting on a healthy gain despite the recent…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

2 promising UK growth stocks I’m eyeing up for May

Ever the income investor, our writer takes a step out of his comfort zone to explore the benefits of two…

Read more »

Portrait Of Senior Couple Climbing Hill On Hike Through Countryside In Lake District UK Together
Investing Articles

BP shares go ex-dividend on 15 May. Time to consider grabbing that 6.5% yield?

Harvey Jones says BP shares have been through a trying time but the FTSE 100 oil giant still offers a…

Read more »