It has managed to stay level since the start of the year, while its counterpart across the Atlantic, the S&P 500, has seen a decline of 10%. The reason behind the two indexes’ different fortunes could be down to their respective constituents.

IPOs don’t like playing FTSE

For the last couple of years, the FTSE 100 has consistently underperformed its US equivalent, at least until recently. The reason for this was a lack of tech and growth companies in the index, as many of these firms opt to list in the US. This is due to the more stringent listing requirements for companies to list on the London Stock Exchange. These include:

• Minimum market capitalisation of £700,000.
• Minimum 25% of shares in public hands.
• Three year trading record required.
• Sponsors needed for new applicants and significant transactions.
• Prior shareholder approval required for significant transactions.

London has historically sought to limit the influence of individual executives, which has deterred many tech companies that are often founder-led. The additional stamp duty to purchase shares also stifles trading volume, presenting another disadvantage for stocks.

No tech, no problem

The FTSE reflects outsized weightings in energy, commodities, and financials. In fact, these three industries account for almost half of the UK’s main index. The S&P, on the other hand, only has 16% of its constituents in these three matured industries.

Due to sky high inflation, the US Federal Reserve has had to hike interest rates. Rising interest rates are normally conducted to slow consumer spending down from higher borrowing costs. So, how has this affected the S&P 500? Given that most technology and growth stocks are valued based on potential future cash flows, a slowdown in overall consumer spending can take a huge chunk off its valuation. This has been evident as tech stocks such as Meta have seen its share price decline 45% from its all-time high.

Simultaneously, FTSE-listed stocks have enjoyed immunity from the weakness of their tech peers. For one, energy stocks such as Shell and BP have enjoyed the tailwinds from rising oil prices. Moreover, high commodity prices in iron ore, copper, and aluminium have also held the index up. Financial stocks, including banks, have also benefited from rising interest rates. This trend is expected to continue in the short to medium term. The outlook for commodities, especially energy and materials, remains solid as the global economy continues to recover from the pandemic.

The million pound question

Is investing in a FTSE 100 fund a good investment for my portfolio then? Well, the British stock market is currently one of the cheapest in the world. It’s trading at a price-to-earnings (P/E) ratio of 14, far lower than the S&P 500’s 16. It also has a projected earnings yield of 13% over the next year, which is forecasted to be twice as much as the S&P.

On that basis, I’m keen to invest in the FTSE 100 for my portfolio through index funds like Vanguard FTSE 100 UCITS ETF (VUKE). Nonetheless, I also see a buying opportunity for the S&P 500, given its incredible track record of producing outstanding returns.

In a recent article, I examined three types of funds that are popular among both beginner investors and experienced investors alike. These included mutual funds, investment trusts and exchange-traded funds (ETFs).

Today, I’m looking at two ETFs that I would definitely consider buying if I was investing my first £1,000 now.

Vanguard FTSE 100 Index Unit Trust

A portfolio of blue-chip companies is a good foundation for any portfolio. With that in mind, if I was investing my first £1,000 today I would consider investing in the Vanguard FTSE 100 Index Unit Trust (LSE: VUKE). This ETF can be bought and sold just like a regular stock under the VUKE ticker.

Vanguard is a highly regarded ETF provider. This particular fund attempts to track the performance of the FTSE 100 index, the UK’s main stock index. That means an investor will gain exposure to the some of the largest companies listed in Britain, many of which are well known across the world. The top 10 holdings of the index are shown below:

Source: Vanguard, data as of 29 December 2017

Fees are low, with the ongoing charge just 0.06%. I would probably invest £500 of my first £1,000 in this fund to gain exposure to the largest companies listed on the London Stock Exchange.

Vanguard FTSE 250 UCITS ETF

Once I had my core holding of blue-chip shares sorted with the FTSE 100 ETF listed above, I’d also be interested in getting some exposure to mid-cap stocks. These are companies that are slightly smaller companies, yet are often growing at a faster pace. This means that they may offer the potential for larger investment returns.

To get exposure to mid-caps, the FTSE 250 index is a good place to start. This index contains the largest 250 stocks in the UK after the largest 100 companies. It’s performed very well over the long term. For example, for the five years to the end of 2017, the FTSE 250 provided a total return 92%. This easily eclipsed the 57% return of the FTSE 100.

Vanguard also has an ETF tracking this index. It’s the Vanguard FTSE 250 UCITS ETF (LSE: VMID). The top 10 holdings are listed below. It includes household names such as Royal Mail, Rightmove and Travis Perkins.

Source: Vanguard, data as of 29 December 2017

The ongoing charge here is just 0.1%. I’d invest the remaining £500 of my £1,000 in this ETF to add a little more growth exposure to my portfolio.

Only last week, the UK’s leading index hit a 14-year high of 6,898.6, just 52 points below its 1999 all-time high of 6,950.

However, the impact of inflation means that comparisons with past values are largely irrelevant, despite their claimed ‘significance’.

After all, inflation means that £6,950 in 1999 was equivalent to approximately £10,000 today, suggesting that the FTSE 100 could be 30% cheaper than it was 14 years ago.

Is the FTSE cheap?

For investors in index-tracking funds such as the Vanguard FTSE 100 ETF (LSE: VUKE) or iShares FTSE 100 ETF (LSE: ISF), what’s important is how the FTSE is valued today — and what kind of dividend income can be expected:

Source: FT

Based on these figures, the FTSE is quite modestly valued, especially as these dividends are covered more than twice by earnings, on average.

Not quite that simple

Of course, it’s not quite that simple. The FTSE 100 is heavily weighted towards the oil, mining and financial sectors.

Royal Dutch Shell alone accounts for 14.5% of the FTSE 100’s total market capitalisation, while the next ten largest companies account for another 35%. This means that if you invest in a FTSE 100 tracker, 50% of your money will be invested in just 11 companies.

Given this, I think it’s worth taking a look at the average valuations of the companies in question, listed in descending size order:

Source: Consensus forecasts

The largest four firms all have low valuations, which help keep the FTSE average P/E down, despite the fact that firms such as Unilever, AstraZeneca, British American Tobacco, SABMiller and Vodafone have much stronger valuations.

Looking at the figures in this way, it’s clear that not all companies in the FTSE 100 are cheap — far from it.

Is the FTSE a buy?

There’s no way of knowing what the FTSE 100 will do over the next year.

What is certain, however, is that a reliable yield of 3.4%, plus likely long-term capital appreciation, is considerably more than you’ll get from most savings accounts.

Of course, the main downside of sticking with a tracker is that you won’t be able to outperform the index — something that’s definitely possible with a portfolio of individual shares.

The expert investors among you may sigh with disappointment, but for the rest of us without the time and skill to pick stock-market winners…

…buying into the FTSE 100 (FTSEINDICES:^FTSE) is the easiest way to benefit from the long-term power of the stock market.

You can track the FTSE 100 through a wide number of funds, including exchange-traded funds such as the iShares FTSE 100 ETF (LSE: ISF), the DB X-Trackers FTSE 100 ETF (LSE: XUKX) and the Vanguard FTSE 100 ETF (LSE: VUKE).

And even the world’s richest investor, Warren Buffett, remains a fan of ‘index tracking’. He wrote this earlier in the month:

“The goal of the non-professional should not be to pick winners… but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost […] index fund will achieve this goal.“

Buy into the FTSE 100 and you will own a cross-section of top British businesses that I’m sure is bound to do well over time.

I mean, you’ll back blue chips such as Royal Dutch Shell, HSBC, GlaxoSmithKline, Vodafone, Diageo, Unilever, British American Tobacco, ARM, Next, Hargreaves Lansdown… alongside another 90 bellwether UK stocks all rolled into one simple fund.

It really is the ‘no-brainer’ investment decision of this ISA season — and every other ISA season beyond that.

And when you consider…

• The FTSE 100 is currently paying a dividend yield of 3.5%, much higher than the interest paid on a typical Cash ISA;
• Dividends from FTSE 100 companies are expected to advance 6% on aggregate this year, according to Capita Asset Services;
• The FTSE 100 index trades at about 13 times the profits made by all 100 companies, which is seen as ‘below average’ by many investors and could mean the market is undervalued, and;
• The FTSE 100 index remains below its record high of 6,930 set at the end of 1999, which suggests the market has some catching up to do.

…then it would seem there is no better time to buy than right now. In fact, by backing the entire FTSE 100, you’ll be able to sit back, relax and simply prosper from the wider market’s progress…

…without the worry of your hand-picked shares hitting trouble or your hand-picked fund manager going off the boil.

And there is a lot to be said about that!