Warren Buffett has long recommended low-cost exchange-traded funds (ETFs) as a good way for investors to build wealth. So it’s no surprise that index funds mimicking the performance of the FTSE 100 are popular with UK investors.
But is a Footsie tracker the right fit for my own portfolio in 2024 and beyond? Let’s discuss.
A few advantages
First, there a number of positives to a passive index investing strategy. For one, it takes away all the hassle of having to find, research and monitor individual stocks. This can be extremely time-consuming, especially as a new investor.
This is one of the main reasons that Buffett advocates index funds. It takes away much of the stress and simplifies the whole process of wealth-building.
Another attractive feature is that investing in a FTSE 100 index tracker would give my portfolio instant diversification. I’d have my money behind a basket of 100 stocks, including world-class businesses like Unilever, AstraZeneca and the London Stock Exchange Group.
This would also provide me with geographic diversification, as most of the firms in the Footsie operate globally. Indeed, around 70% of the revenue generated collectively by these companies is from overseas.
So this would give my portfolio exposure to global growth, including rapidly developing regions like South-East Asia.
Finally, some platforms still charge fees to buy and sell stocks. It would therefore work out much cheaper to buy just a single investment.
The Vanguard FTSE 100 UCITS ETF, for instance, currently has a very low ongoing charge of 0.09%. And it offers a handy dividend yield of 4.1%, which could potentially boost my passive income.
A few downsides
However, there are a few drawbacks to this strategy, I feel.
An obvious one is that I’m limiting myself to average returns. For the FTSE 100, that’s an annualised return of around 7.5% (including dividends) since 1984.
While that’s certainly nothing to be sniffed at, my portfolio wouldn’t benefit directly from the top individual performers.
For example, this year the FTSE 100 is basically flat (excluding dividends). What’s happened is that some stocks have gone up while others have gone down, cancelling each other out in the process.
Yet, within the index, shares of Rolls-Royce have more than trebled so far in 2023. And well-known stocks like retailers Marks and Spencer and B&M European Value are up 104% and 47%, respectively.
Plus, over five years, stocks like Frasers Group (up 213%), Ashtead (177%) and JD Sports Fashion (120%) have easily outperformed the FTSE 100 (10%).
Buying just a tracker fund would mean potentially missing out on this outperformance.
A better strategy?
The Foolish takeaway here is that I think individual investors like myself can do better than a FTSE 100 tracker fund.
After all, it’s a big wide world out there, with the opportunity to invest across the globe (both actively and passively). Why limit my portfolio to just the Footsie?
Mega-trends like artificial intelligence, electric vehicles and rocket technology for space exploration are all advancing rapidly.
Meanwhile, there are plenty of resources nowadays to find great investing ideas, including services like The Motley Fool’s Share Advisor.
Looking ahead, there has never been a more exciting time to be a stock-picker, in my opinion.
