When the trend for tracker funds took off 20 years or so ago, the biggest sellers of all were inevitably FTSE 100 trackers. Following the fortunes of the UK’s benchmark index of 100 leading companies appeared to be the best way of passively following the UK stock market, especially in the booming 1990s.
The last 15 years have soured that strategy, yet millions of investors (including me) still have hefty exposure to what is an increasingly unrepresentative index.
Heavy Metals
One of the attractions of tracking the FTSE 100 is now one of its major drawbacks. Its constituents generate 75% of their revenues overseas, which makes this index a great way of investing in fast-growing global markets from the safety of these well-regulated shores. The downside is that a disproportionate amount of these earnings come from a narrow range of sectors.
I’m thinking of oil and gas stocks, which make up a whopping 11% of the index by weighting, led by BP and Royal Dutch Shell. Resources stocks make up another 5%, thanks to BHP Billiton, Rio Tinto, Anglo-American, Antofagasta, Glencore and Fresnillo. That has made the last year a bleak one for the index: the HSBC FTSE 100 Index tracker is down nearly 9% over the past 12 months, for example, while sister tracker the HSBC FTSE 250 Index is up more than 8%.
Big Bad Banks
Oil and commodity stocks aren’t entirely to blame, either. The index is also heavily exposed to the troubled banking sector, which makes up 10% of the index. Barclays, Lloyds Banking Group, Royal Bank of Scotland Group have all had a turbulent and punishing decade. HSBC Holdings (which makes up 6.33% of the index on its own) and Standard Chartered were supposed to boom on back of Chinese and Asian markets, only to suffer for the same reason.
Then there is the troubled grocery sector, with J Sainsbury, WM Morrison and of course Tesco all heavily marked down over the past five years.
Wheel Of Fortune
Naturally, oil, resources, banking and grocery stocks won’t always be at the sharp end of the business cycle, at some point the wheel of fortune will swing in their favour and the FTSE 100 will beat the FTSE 250 again. The last time it did this was in 2007, when it grew 2.5%, against a 7% drop on the 250. It also offered some ballast in 2011, falling 2% against a 10% slump on the FTSE 250.
You should still examine your exposure to FTSE 100 trackers. If you have directed too much of your portfolio into them, you could have an absurdly lopsided portfolio.
Also ask yourself you want so much exposures to troubled sectors such as oil, banking and supermarkets. It may be worth buying individual stocks instead, which allows you to pick out likely winners from the index rather than passively tracking the fortunes of losers as well.
Passive investing has its attractions but only if you take an active interest to find out exactly what you are investing in.