Best FTSE 100 ETFs

What are FTSE 100 ETFs?

A FTSE ETF is an exchange-traded fund (ETF) that follows the performance of the FTSE 100 index. The FTSE 100 is an index compiled of the top 100 stocks on the London Stock Exchange with the highest market capitalisation (market cap).

Usually, exchange-traded funds work by investing in the underlying holdings of a specific stock market index. So, an ETF that tracks the FTSE 100 will aim to reflect the performance of the top 100 firms by market cap in the UK market. Current constituents of the FTSE 100 include companies such as AstraZeneca, BP, Shell, Diageo, and Unilever.

Aside from the FTSE 100, there are also ETFs tracking many different indices around the world. For example, the SPDR FTSE UK All Share UCITS ETF uses the FTSE All-Share as its underlying index.

What are the benefits of investing in FTSE 100 ETFs?

There are a number of advantages to investing in FTSE 100 ETFs. I have outlined a few of these below:

Long-term capital growth

ETFs are often best suited as a long-term investment, because the units involved in the fund tend to increase in value over extended periods, typically at least five years.

The FTSE 100 index has averaged an annualised return of c.8% since its inception in 1984. Therefore, investing in an ETF that exclusively tracks the index has the potential to provide similar returns.

Of course, in some years returns have been negative throughout this period. Additionally, past performance is not an indicator of future performance, and companies on the index may not always grow as they have done previously. But overall, investing in an index fund like the FTSE 100 can lead to long-term growth.

Diversification

Buying an ETF gives you instant exposure to the index it follows. This means greater diversification across sectors and industries in the UK than you might be able to achieve when buying individual stocks and shares.

Low-cost investment

It is generally cheaper to invest in ETFs than mutual funds. This is because mutual funds, which are more likely to be actively managed funds, require investors to pay heftier management fees to fund managers.

There are annual charges for ETFs too, but these are typically smaller than actively managed funds. For example, you can invest in some ETFs that have annual charges of just 0.07-0.09%, such as the Vanguard FTSE 100 UCITS ETF.

What to consider before buying a FTSE 100 ETF

As with any investment, there are also downsides to investing in FTSE 100 ETFs, which are listed below:

Minimal technology exposure

The FTSE 100 is a slow-moving index, and is considered one of the most stable indices. One of the key reasons for this is because the FTSE 100 has minimal technology exposure, as the UK is not as big an exporter of technology as other nations such as the US. Although this limits volatility as tech stocks tend to be volatile, it also means investors may not get direct exposure to top-class technology firms which tend to generate much bigger returns over the long term.

Tracking errors

An ETF manager will try to keep their fund’s investment performance aligned with the index it tracks, but that may be easier said than done. That’s because tracking errors, while fairly uncommon, can occur with any index-tracking fund, and FTSE 100 ETFs are no exception.

An ETF can stray from its intended benchmarks for many reasons. If the fund manager needs to swap out assets in the fund or make other changes, the ETF may not reflect the holdings of the index. As a result, the performance of the ETF may deviate from the performance of the index.

Best FTSE 100 ETFs FAQs