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FTSE 100 tracker funds are popular investments today. With these ‘passive’ products, one can get exposure to the UK’s main stock market index at a very low cost.
Are they good investments, though? Let’s take a look at how much they’ve returned over the last five years.
Tracking the FTSE 100
There are many different Footsie trackers available to investors today. And they’re not all the same.
For example, there are exchange-traded funds (ETFs), which are listed on the stock market. And then there are index funds, which trade like regular investment funds.
There are also accumulation funds (which reinvest all dividends) and income funds (which pay out income to investors).
To simplify things, I’m going to focus my analysis on the HSBC FTSE 100 Index (accumulation). This is an index fund (available on platforms like Hargreaves Lansdown and Interactive Investor), which reinvests dividends.
Five-year performance
Now, according to Hargreaves Lansdown, this particular fund returned 32.1% for the five-year period to 25 January. That equates to a return of about 5.7% per year.
I’ll point out that investors would not have received this exact return. That’s because investment platforms charge annual fees. When fees are factored in, the five-year return would probably be closer to 30%.
But let’s stick with the figure of 32.1% for now. So, how does that stack up?
Not bad but not good
Well, it’s not terrible.
It’s a higher return than a savings account would have delivered (savings accounts were paying 1% or less for a lot of the five-year period)
And it’s roughly in line with inflation over that time. In other words, the money would have retained its purchasing power.
But I wouldn’t say that 32.1% over five years is a particularly good return.
Especially when one considers what some other investments have done over that time period.
Take the Legal & General Global 100 Index, for example. This fund, which tracks the 100 largest companies globally, has returned 112% (before fees).
Or, the Vanguard US 500 Stock Index. This product, which tracks the US’s S&P 500 index, has returned 101% (before fees).
A lot of individual stocks have delivered even higher returns. Over the last five years, we’ve seen Apple stock rise around 400% while Nvidia shares have gained over 1,400%.
Here in the UK, London Stock Exchange Group shares have climbed about 100% while BAE Systems shares are up roughly 130%.
Looking at the performance of these funds and shares, the 30% return from a FTSE 100 tracker does seem a bit underwhelming.
Better investment strategies?
Now, past performance is not representative of future returns, of course.
And FTSE 100 trackers may have a period of outperformance at some stage.
I personally feel that long-term investors can generally do better than Footsie tracker funds, however.
Instead of just owning a UK tracker fund, I believe investors are better off building a portfolio of global funds and then adding some high-quality stocks on top (The Motley Fool can be a great source of ideas here) in an effort to achieve strong, market-beating returns.
By taking a more diversified – and adventurous – approach to investing, investors may be able to give themselves a better chance of financial success.
