The FTSE 100 index is a very popular investment in the UK. Indeed, some people simply put all their capital into FTSE 100 tracker funds and don’t bother investing outside of it.
I can understand why the FTSE 100 is popular. For starters, it’s a highly recognisable index as it’s always quoted in the media. Secondly, it contains many household names, including the likes of Royal Dutch Shell, HSBC, and British American Tobacco, so investors know what they’re getting with the index. Third, most of us generally prefer to invest on home soil as opposed to internationally.
Is the FTSE 100 all you need though? In my view, no. Whereas some people see the index as a one-stop shop, I’m convinced that investors need to be looking outside the FTSE 100 in order to be fully diversified and give themselves the best chance of generating strong returns from the stock market. Here’s a look at three reasons why the FTSE 100 isn’t perfect.
Backward-looking
One issue I have with the FTSE 100 is that I see it as kind of a ‘backward-looking’ index. The Footsie contains many companies that have been tremendously successful in the past, yet there are question marks as to whether these companies will enjoy the same levels of success in the future.
For example, as the world gravitates towards renewable energy, will the oil majors Shell and BP continue to thrive? As fintech companies continue to disrupt the banking industry, will slow-moving banks such as HSBC continue to grow? As attitudes towards smoking change and smoking rates decline, will tobacco stocks such as British American Tobacco be able to increase their profits? I’m not so sure. Many companies at the top of the FTSE 100 index are yesterday’s heroes, in my opinion, and that concerns me.
Lack of technology
Another flaw with the FTSE 100 is that it lacks exposure to the technology sector. Whereas the S&P 500 index contains a number of fast-growing tech stocks such as Apple, Google and Netflix, the FTSE 100’s exposure to the tech sector is very limited with just two tech stocks in the index – Micro Focus and Sage (there are a few others that could be considered tech stocks such as Rightmove, Just Eat and Auto Trader).
Technological advances are having a profound impact on the world right now and many technology companies are enjoying rapid growth in profitability. This is pushing their share prices up. Investors that have minimal exposure to the technology sector could be left behind.
Currency impact
Finally, it’s also worth noting that the FTSE 100 is highly susceptible to currency swings because it contains so many companies that have global operations. When the pound rises, many FTSE 100 stocks fall and vice versa. This is not ideal. It can be frustrating when the stock market falls because the pound has strengthened.
So overall, I see a number of flaws with the FTSE 100. I think the index is fine as a core portfolio holding, but in my view, investors need to also consider investments outside the Footsie if they want to generate healthy returns going forward.