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I’m not the biggest fan of FTSE 100 index (tracker) funds. That’s because there are plenty of other stock market indexes that have better long-term performance track records than the Footsie.
However recently, the UK stock market index has done pretty well. Here’s a look at how much an investor would have today if they’d chucked £10,000 in a Footsie tracker fund five years ago.
10% a year?
There are many different FTSE 100 trackers on the market today (including index investment funds and exchange-traded funds (ETFs). I’m going to zoom in on the iShares Core FTSE 100 UCITS ETF GBP (Acc) (LSE: CUKX).
The reason I’ve picked this one is that it’s an accumulation fund, meaning that all dividend income’s reinvested (for further gains).
Additionally, it’s an ETF with super-low fees (the total expense ratio’s just 0.07%). Often, ETFs have significantly lower fees than index investment funds (especially when you factor in platform charges).
Five years ago, this ETF was trading for £108. Today however, it’s trading for £174.
This represents a gain of 61%, meaning that the initial £10,000 investment would now be worth about £16,100. On an annual basis, that translates to a return of around 10%.
These returns ignore trading commissions and platform charges. But I’m sure you’ll agree, they’re decent. If you can consistently achieve a return of 10% a year, you can potentially double your money in around seven years. With that kind of return, wealth can be build quickly.
Long-term returns
However, before you rush out and invest in a FTSE 100 tracker fund like the one above, there’s an important thing to point out. And that’s five years ago, share prices were depressed due to the coronavirus.
The fact that share prices were low back then has made a big difference to the index’s returns. Normally, returns from the index aren’t this high.
Recently, I calculated the average return for the FTSE 100 (including dividends) over the last 10 calendar years and it came out at just 6.2%. That’s a little underwhelming, especially when you compare it to returns from other indexes such as the S&P 500 (around 12.7% a year in US dollar terms).
My view now
Given the underwhelming long-term returns from the FTSE 100 – which are largely the result of a lack of innovation in the index – I still believe a Footsie tracker isn’t the best investment out there today. While these tracker funds do have some benefits (they offer exposure to companies trading cheaply and paying big dividends) I think long-term investors are better off considering a global tracker or a US index fund if they’re looking for broad exposure to the market.
An allocation to individual stocks could also be worth considering. Stocks are riskier than index funds, but there’s potential for much higher returns.
Just look at Amazon (which I believe is worth considering today while it’s well off its highs). Over the last decade, it’s delivered a return of about 25% a year, turning a $5k investment into more than $45k.
