Everyone’s heard of the FTSE 100 index (or ‘Footsie’ in popular parlance). When the general news media features the UK ‘stock market’, it’s invariably with reference to the FTSE 100. As such, many people who decide to invest in the stock market choose a Footsie tracker.
In this article, I’m going to discuss another UK index for which trackers are readily available — the FTSE All-Share index — and tell you three reasons why I think this index is a better choice for investors than the FTSE 100.
Reason #1
As its name suggests, the FTSE 100 is an index of 100 companies. They’re the biggest companies listed on the main market of the London Stock Exchange. The FTSE All-Share index includes all the FTSE 100 companies and over 500 more.
With an All-Share tracker your money is invested in a far wider range of businesses, including in sectors that aren’t represented, or are poorly represented, in the FTSE 100. For example, to name just three, there are no pub groups, cinema chains or self-storage operators in the Footsie. Meanwhile, an All-Share investor has a little money in these sectors, via the likes of Wetherspoons, Cineworld and Big Yellow.
The greater number of companies and the greater range of sectors is the first reason why I’d buy an All-Share tracker instead of a FTSE 100 tracker.
Reason #2
Both indexes are weighted by market capitalisation (market cap for short). The market cap of a company is simply its share price multiplied by the number of shares it has in issue. Oil giant Shell is the biggest company in the FTSE 100 with a market cap of getting on for £200bn. Its index weighting is over 50 times that of current number 100 Marks & Spencer, whose market cap is around £3.5bn.
The FTSE 100 companies represent about 85% of an All-Share tracker, but having another 15% in companies outside the Footsie usefully dampens the dominance of the ‘megacaps’ like Shell. The table below shows the weightings of the top five companies in HSBC’s FTSE 100 and FTSE All-Share trackers (as of 30/4/19).
|
|
HSBC FTSE 100 Index (%) |
HSBC FTSE All-Share Index (%) |
|
Royal Dutch Shell |
11.0 |
8.7 |
|
HSBC |
7.0 |
5.5 |
|
BP |
5.8 |
4.5 |
|
AstraZeneca |
4.5 |
3.8 |
|
Diageo |
4.2 |
3.4 |
In the FTSE 100 tracker, the biggest five holdings represent almost a third of the index, while in the All-Share tracker it’s nearer a quarter. I think the latter is preferable, and this is the second reason why I’d choose an All-Share tracker over a FTSE 100 tracker.
Reason #3
Last but not least of my three reasons is performance. The table below shows the total return (including reinvested dividends) of HSBC’s FTSE 100 and FTSE All-Share trackers over one, three and five years.
|
|
1 year (%) |
3 years (%) |
5 years (%) |
|
HSBC FTSE 100 Index |
-1.6 |
18.3 |
28.2 |
|
HSBC FTSE All-Share Index |
-2.0 |
18.4 |
30.6 |
These figures reflect the broader history of the relative returns of the two indexes. Briefly put, the FTSE 100 has tended not to fall as far as the All-Share when markets drop (as in the one-year figures), but the All-Share has tended to outperform over the long term (as in the five-year figures).
Foolish bottom line
A FTSE 100 tracker can do a very decent job for investors. However, for reasons of diversification, company weightings and long-term performance, I think a FTSE All-Share tracker could be a superior option.
