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3 reasons I won’t be investing in a FTSE 100 tracker fund in 2020

Edward Sheldon, CFA
Screen of price moves in the FTSE 100

In recent years, FTSE 100 tracker funds have become extremely popular among UK investors. Proponents of these passive funds argue that they’re the best way to gain exposure to the stock market because they provide you with access to the whole market for a very low cost.

Personally, I’m not convinced that FTSE 100 trackers are the best way to invest in stocks. In my view, these funds have a number of major flaws. Here’s a look at three reasons I won’t be buying a FTSE 100 tracker for my own portfolio in 2020.

Too many dogs

The first reason I’m not sold on FTSE 100 trackers is that the Footsie contains a number of low-quality stocks that I have absolutely no interest in owning.

Examples include:

  • BT Group – it’s saddled with debt and is struggling to generate any revenue growth

  • Vodafone – it recently slashed its dividend by 40%

  • Tesco – it’s under pressure from Aldi and Lidl and losing market share at a rapid rate

  • Centrica – it just cut its interim dividend by nearly 60%

There are plenty of others I’m keen to avoid too.

Overall, there are probably only around 20-25 stocks in the whole of the FTSE 100 that I actually want to own. I’m talking about high-quality, reliable dividend payers such as Unilever, Diageo, Prudential, and Sage.

So, why buy the whole index when I can focus on reliable companies that I believe have attractive long-term growth prospects?

Not enough technology

What also concerns me about the FTSE 100 index is that it has high exposure to low-growth industries such as oil & gas and tobacco, and is seriously underweight to the technology sector.

Whereas the S&P 500 index has around 22% exposure to the technology sector and contains the likes of Microsoft (which just landed a $10bn contract with the Pentagon), Apple (it’s rumoured to be launching a $399 iPhone next year), and Google (it’s at the heart of the internet and owns YouTube), the FTSE 100 has just 0.6% exposure to tech (according to the official FTSE 100 factsheet).

Given that we’re in the middle of a technology revolution right now, the FTSE 100’s lack of exposure to the tech sector worries me.

Serial under-achiever

Finally, it’s worth noting that when it comes to performance, the FTSE 100 is a serial under-achiever. For example, over the last five years (to the end of October), the index has returned just 6.3% per year. That’s a very underwhelming return. By contrast, the S&P 500 has returned 10.8% per year.

What’s worse is that since the start of the millennium, the Footsie has only risen around 5% (yes just 5%!) in capital gains terms (i.e. not including dividends). At the same time, the S&P 500 has more than doubled.

Why would I want to own an index fund tracking such a low-growth index? 

All things considered, I believe that I can do much better than just owning a FTSE 100 tracker fund. With a selection of high-quality UK stocks (both dividend stocks and growth stocks), and some top funds such as Fundsmith and Lindsell Train Global Equity that provide exposure to world-class companies listed overseas, I think it shouldn’t be too hard to outperform the FTSE 100 over time.

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Edward Sheldon owns shares in Unilever, Diageo, Prudential, Sage, Apple, Microsoft, Alphabet, and has positions in the Fundsmith Equity fund and the Lindsell Train Global Equity fund. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Apple, Microsoft, and Unilever. The Motley Fool UK has recommended Diageo, Prudential, Sage Group, and Tesco and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2021 $85 calls on Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019