FTSE 100 tracker funds are popular investments in the UK and it’s easy to see why. With these products, investors can get exposure to the 100 largest companies on the London Stock Exchange with just one holding.
Should I buy a Footsie tracker fund for my own portfolio? Or are there better ways to invest my money for 2023 and beyond? Let’s discuss.
Diversification at a low cost
I can certainly see some appeal in owning one of these tracker funds.
For starters, they make investing very easy. With these funds, investors don’t need to worry about stock research or stock picking. So, a Footsie tracker could save me a lot of time and effort when it comes to putting together a stocks portfolio.
Secondly, they offer instant diversification. With just one click, I could get portfolio exposure to 100 different stocks. Owning a diversified portfolio is important, as it reduces risk significantly.
Third, they’re very cost effective. For example, the Vanguard FTSE 100 Index fund on Hargreaves Lansdown has an ongoing charge of just 0.06% per year (plus platform fees). That’s much cheaper than most actively-managed investment funds. Keeping fees low is one of the secrets to success in investing.
Finally, I could generate some passive income if I selected an ‘income’ version of a Footsie tracker fund. These pay out the dividends they collect from FTSE 100 constituents to investors. Currently, the yield on the FTSE 100 is about 3.8%.
No flexibility
FTSE 100 trackers do have their disadvantages though.
One that concerns me is that they don’t give me any control over the stocks I own – I’m forced to own every stock in the index. This isn’t ideal. For example, I’d prefer not to own tobacco stocks.
Another issue for me is the composition of the FTSE 100. Here’s a look at the top 10 holdings in the Vanguard FTSE 100 Index fund at the end of October. Combined, these 10 stocks made up about 50% of the index.
Stock
Weighting (%)
Shell
9.5
AstraZeneca
8.2
Unilever
5.4
HSBC Holdings
4.9
BP
4.8
Diageo
4.4
British American Tobacco
4.1
Glencore
3.5
GSK
3.1
Rio Tinto
2.7
Source: Hargreaves Lansdown
There are two main issues for me here. One is that oil (Shell and BP) make up nearly 15% of the index. Another is that there are no technology stocks in the top 10 holdings. As a long-term investor, this composition is not a great fit for me, in my view.
Underwhelming performance
Lastly, it’s worth looking at the long-term performance of the FTSE 100. The table below shows the performance of the Vanguard FTSE 100 Index fund over one, three and five years, versus the performance of the Vanguard US 500 Stock Index (which tracks the US market) and the Vanguard FTSE Global All Cap Index (a global tracker fund).
1-year return (%)
3-year return (%)
5-year return (%)
Vanguard FTSE 100 Index
4.7
7.6
17.7
Vanguard US 500 Stock Index
-8.5
36.8
67.2
Vanguard FTSE Global All Cap Index
-8.5
24.1
41.1
Source: Hargreaves Lansdown. Data to 16/12/2022
While the FTSE 100 has outperformed over the last year, its performance over three and five years has been quite underwhelming. A 17.7% return over five years is relatively low. This track record concerns me a bit.
My move now
Weighing everything up, I won’t be buying a FTSE 100 tracker fund for 2023.
Instead, I’ll continue to pick individual stocks (both UK and international stocks) for my portfolio.
This approach will give me more flexibility and also give me a chance of outperforming the index over time.
The post Should I buy a FTSE 100 tracker fund for 2023? appeared first on The Motley Fool UK.
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Edward Sheldon has positions in Hargreaves Lansdown, Diageo Plc and Unilever Plc. The Motley Fool UK has recommended Hargreaves Lansdown, British American Tobacco P.l.c., Diageo Plc, GSK, HSBC Holdings, and Unilever Plc. 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.