The FTSE 100 is the UK’s leading stock index. Comprised of the biggest 100 companies in the country, the index is a gauge of prosperity for businesses regulated by UK company law.
Formerly known as the Financial Times Stock Exchange 100 Index, over the years this has morphed from being UK-focused to more of a barometer of global economic health. Today, around 70% of FTSE 100 constituent profits come from outside the UK.
With this being the case, the FTSE 250 is now a better barometer of activity across UK Plc, but that doesn’t mean you should give up on its big brother. Indeed, here are three reasons why you should invest in the FTSE 100 today.
1. Diversified income
Many investors (including myself) invest for income, but seeking out the market’s best dividend stocks can be tricky. The last thing you want to do is end up on the receiving end of a dividend cut, which can result in costing you many years of dividend income in capital losses.
Luckily, many of the market’s best dividend stocks are included in the FTSE 100. This means it’s easy to build a dividend portfolio by buying the entire index.
FTSE 100 constituents such as Royal Dutch Shell and Vodafone are some of the world’s most generous dividend stocks, which shows in the index’s yield. The Footsie currently supports an average dividend yield of 3.8%, the second highest index yield in the world. The FTSE Emerging Europe comes in first place with an average yield of 4.7%.
It will cost you just 0.04% per annum (Legal & General UK 100 Index fund brought through Hargreaves Lansdown) to get your hands on this diversified, hands-free income stream. Even after including management charges, the 3.8% yield is still well above the Bank of England’s 0.75% base interest rate.
2. Brexit protection
As I have covered before, another benefit of buying the FTSE 100 is its international exposure. With more than two-thirds of profits coming from outside the UK, the index is a tremendous Brexit hedge. If the UK’s economy stutters after leaving the EU, companies with large international exposure will be able to offset UK weakness with growth in other regions.
What’s more, many FTSE 100 companies report earnings in US dollars and, as the value of the pound has declined over the past two years, profits have surged sending stock prices higher. The sterling value of dividends paid in dollars has also increased.
3. Cheap and effortless
Because the FTSE 100 is such a widely-used index, fund providers can offer exposure cheaply. Indeed, as noted above, the lowest-cost Footsie tracker on the market today costs to 0.04% per annum.
Low costs are necessary because they are one of the few factors investors can control… and high costs can ruin years of hard work.
For example, if you invest £1,000 in a fund charging 0.04% per annum, after 10 years with an average annual return of 6%, the initial investment will be worth £1,784, with just £7 paid in fees over the period. However, if you make the mistake of buying a fund with an annual management charge of 2%, you’ll end up paying £311 over the decade, and your final pot will be worth only £1,480.
Put simply, it really pays to do the extra work and find the low-cost fund option. Luckily, with the FTSE 100, there are plenty of options.
