How to invest in the FTSE 100

The FTSE 100, often referred to as the ‘Footsie,’ is a stock market index that represents the 100 largest companies listed on the London Stock Exchange (LSE) by size.

What is the FTSE 100 and when did it start?

The FTSE 100 was created in 1984 at a starting level of 1,000 points and recently celebrated its 40th birthday. The index is maintained by the FTSE Group, a subsidiary of the London Stock Exchange Group, and includes well-known companies across various sectors, such as financial services, energy, consumer goods, and healthcare. Some of the well-known companies in the FTSE 100 include Shell, HSBC, Unilever, Tesco and AstraZeneca.

The FTSE 100 accounts for a large proportion – around 80% – of the UK’s total share market value. Although it’s often referred to as a yardstick of UK stock market returns, it’s not a very good gauge of how the UK economy is doing. That’s because most nearly all the companies in the FTSE 100 generate revenues globally, and some are almost exclusively international businesses.

Overall, as much as three-quarters of the earnings of FTSE 100 constituents come from non-UK activities, with internationally oriented energy and mining stocks alongside global pharmaceutical giants, food and beverage firms and the big banks accounting for much of this. The FTSE 250, which represents the next 250 largest UK-listed companies, is more representative of how domestic enterprises are faring.

In the context of global markets, the FTSE 100 serves as a useful barometer of returns from the UK market, but it is small in the grand scheme of things, representing only around 3% of global share markets. However, it’s important to many UK investors who hold shares in the index constituents or have exposure through a fund investing in the UK.

Read more: How to choose an investment fund

Is the FTSE 100 a good investment?

The FTSE 100 hasn’t been the best performer over the years in terms of capital growth, especially since the turn of the millennium. Returns have lagged versus the more dynamic US market. However, it has boasted a hidden benefit of providing a high dividend income stream to investors.

Many FTSE 100 companies are large, established firms with a history of stable earnings and dividends, but the index has lacked exposure to the dominant technology sector that has propelled global stock market returns most vigorously over the past couple of decades.

How to invest in the FTSE 100

There are several ways to invest in the FTSE 100:

• Buy individual shares: You can buy shares of individual companies listed in the FTSE 100 through your Stocks & Shares ISA, SIPP or investment account. This approach allows you to select specific companies you believe could perform well.
• Exchange-Traded Funds (ETFs): ETFs that track the FTSE 100 index are a popular way to invest. These funds aim to replicate the performance of the index by holding shares of the constituent companies.
• Index Funds: Like ETFs, index funds aim to replicate the performance of the FTSE 100. They are ‘passively’ managed and typically have lower fees compared to actively managed funds.
• Managed Funds: Some actively managed funds focus on FTSE 100 companies. These managed by professional fund managers who select stocks based on their research and analysis.

There are also ETFs and Index funds that use the broader FTSE All-Share index as their target index. This comprises the FTSE 100, FTSE 250 and FTSE Small Cap index.

Active funds are likely to hold some small and medium-sized companies too so tend to use the wider All-Share index as their comparative benchmark. The All-share is generally considered to be a superior performance measure of the UK stock market as it contains about 600 stocks as opposed to just 100.

Looking for more investment opportunities? Explore our Preferred List of funds and trusts.