The question of whether a FTSE 100 index tracker is a good investment is one that tends to divide opinion.
On the one hand, there are plenty of investors who believe the index has robust long-term growth prospects and that a tracker is an attractive investment. On the other, there are those who believe the index has flaws and that there are better ways of investing in the stock market than simply tracking it.
World-class companies
If you’re just starting out investing, I can see the appeal of investing in the FTSE 100 via a passive index tracker.
For starters, the index contains 100 large-cap companies, meaning it provides you with relatively broad exposure to the stock market. Secondly, it’s home to some world-class companies such as Diageo and Unilever.
Ultimately, the FTSE 100 is a relatively safe investment that should provide solid returns over the long run and an index tracker is also an easy way to invest.
Low-growth index
That said, one issue I personally have with the Footsie is that it has significant exposure to low-growth industries and very little exposure to the fast-growing technology sector.
Take a look at the top 20 FTSE 100 holdings right now, which make up around 60% of the index.
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There are certainly some fantastic companies on that list. But there are also plenty of companies that have been successful in the past yet are now facing long-term structural challenges, in my opinion.
For example, the oil (Shell, BP) and the tobacco (British American Tobacco) industries are under huge pressure from the shift towards sustainability. Meanwhile, the banking industry (HSBC, Lloyds, Barclays) is undergoing significant change due to the rise of digital banks and competition on payment methods from tech giants such as Apple. Right now, it’s difficult to predict what oil and banking will actually look like in a decade’s time.
Investing is all about looking ahead. As such, I think an investment in a FTSE 100 index tracker may not be the best approach if you’re seeking high returns.
Performance track record
Another issue to consider is the FTSE 100’s performance track record. While the index does have a relatively solid long-term performance track record since its inception in 1984, its performance over the last decade has been a bit disappointing relative to other major stock market indexes. For example, for the 10-year period to 31 December 2019, the FTSE 100 delivered a total return of 7.39% per year. By contrast, the S&P 500 generated a return of 13.56% per year and the MSCI All-Country World index delivered a return of 8.8% per year.
Of course, that still easily beats investing in bank savings accounts or Cash ISAs. And the FTSE 100 could bounce back and outperform in the future. However, given that it is dominated by slow-moving companies, there’s no guarantee this will happen.
A good investment?
Weighing everything up, I believe there are better investments than a FTSE 100 index tracker for anyone prepared to do their own research .
Put together a portfolio of high-quality UK companies (both large and small) with strong growth prospects, then add in international exposure through funds, and I think you’re likely to generate higher returns than a FTSE 100 tracker over the long run.
