The FTSE 100 index doesn’t tend to deliver huge returns for investors. Compared to other major stock market indexes such as the S&P 500 and the Nasdaq 100, returns are often a little underwhelming.
However, the Footsie’s returns over the last five years may surprise you. Here’s a look at how much £10,000 invested in a FTSE 100 tracker fund five years ago would be worth today.
10.5% a year?
There are lots of different FTSE 100 tracker funds on the market today. To keep things simple, I’m going to use the Vanguard FTSE 100 UCITS ETF (LSE: VUKG) as a proxy for such trackers.
I’m focusing on the ‘accumulating’ version of the ETF as opposed to the ‘distributing’ version. The former reinvests all dividends (a large component of FTSE 100 returns) while the latter pays them out to investors.
Five years ago, this ETF was trading for £26. Today however, it’s trading for £43 – roughly 65% higher.
That works out to an annual return of about 10.5%. And it means that a £10,000 investment five years ago would now be worth about £16,500 (ignoring trading commissions and platform charges).
The high returns explained
That’s a high return from the FTSE 100. The annualised return of 10.5% return is significantly higher than the 20-year average return from the index, which is a little over 6%.
So, what’s going on here?
Well, back in the second quarter of 2020, there was a lot of economic uncertainty due to the coronavirus pandemic (which had just started). As a result, many FTSE 100 shares were trading at low levels.
Over the last five years, however, most shares have recovered (many have gone on to hit new all-time highs). So, anyone who invested in the FTSE 100 during the early 2020 weakness has been rewarded financially.
This is a great example of why it can pay to follow Warren Buffett’s advice and invest when there’s a high level of uncertainty and other investors are ‘fearful’. Often, buying stocks during market weakness can deliver higher-than-average returns over the long run.
An opportunity today?
It’s worth pointing out that there’s a lot of fear within the investment community today given the high level of economic uncertainty we are faced with at present.
Recently, many investors – both retail and institutional – have been dumping stocks and piling into bonds and cash. So, there could potentially be another major opportunity for long-term investors right now.
Having said that, there’s a chance that the market could go lower from here. So, I wouldn’t recommend going ‘all-in’ on stocks in one go. I Think investors should consider saving some cash for any near-future corrections.
I also think there are better investments to consider than the Vanguard FTSE 100 UCITS ETF and other Footsie trackers. The issue with these products for me is that they don’t provide much exposure to the technology sector.
And that’s a sector that I think investors should have plenty of portfolio exposure to over the next five years. After all, the world is only going to become more digital in the years ahead.
