The FTSE 100 is the UK’s best-known stock market index. Made up of the 100 largest companies listed on the London Stock Exchange, it includes names such as Royal Dutch Shell, BP, HSBC Holdings, and Unilever. Here, I’ll explain how to invest in the index.
FTSE 100 ETFs
Unfortunately, you can’t invest directly in the FTSE 100. However, one easy way to get exposure to the index is to invest in an exchange-traded fund (ETF), or tracker fund as they are also called, that tracks it. This kind of fund is designed to replicate the performance of the index minus a very small annual fee. So, for example, if the FTSE 100 rises by 1%, the value of your tracker fund should also rise by around 1%. If the FTSE 100 falls by 1%, the value of your tracker fund will fall by approximately that much.
Today, there are a number of FTSE 100 tracker funds available to UK investors. Some of the most popular funds include:
ishares 100 UK Equity Index fund
HSBC FTSE 100 Index fund
Legal & General UK 100 Index Trust
Vanguard FTSE 100 Index fund
To invest in one of these, you’ll need an account with an online broker such as Hargreaves Lansdown, Interactive Investor, or AJ Bell.
All of these tracker funds offer very low annual fees (0.06% to 0.18% per year) meaning that they are a cost-effective way to get exposure to the index. However, you also have to pay trading commissions when you buy or sell ETFs, which are generally around £10-£12 per transaction.
Be aware that all of the ETFs listed above come with ‘accumulation’ and ‘income’ versions. The difference here is that an accumulation fund will reinvest all your dividends (profits that companies pay out to investors) while an income fund will pay you an income stream. You can find out more about this here.
Overall, if you’re looking for cost-effective, hassle-free exposure to the FTSE 100, a tracker fund could be a good option.
FTSE 100 stocks
Another option that you may want to consider is investing in individual FTSE 100 stocks through an online broker.
Some investors prefer to buy individual stocks, instead of buying the whole index, because history suggests that not every company in the index will perform well in the future. As such, if you do your research and pick the right stocks, you could outperform the index. Picking your own stocks also provides you with more flexibility. For example, if you want to avoid tobacco stocks or defence companies for ethical reasons, you can do this. However, if you buy a tracker fund, you’ll automatically be exposed to these kinds of companies.
Investing in individual companies is more hassle, of course. It’s also likely to be more expensive than investing in a tracker fund because you’ll have to pay trading commissions on each stock you buy. This means that it’s not really a suitable approach for investors with a small amount of capital as it’s not economical. For example, if you want to buy 20 stocks to diversify your portfolio but you only have £2,000 to invest in total, trading commissions (20 x £10) will cost you around 10% of your money.
However, once you have built up some capital, investing directly in FTSE 100 companies is certainly an approach worth considering. With a solid investment strategy, you could potentially outperform the index.
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Edward Sheldon owns shares in Royal Dutch Shell, Unilever, and Hargreaves Lansdown. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Hargreaves Lansdown and HSBC Holdings. 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