What Is the FTSE 100?

The FTSE 100 is the most widely recognised stock market index in the UK. Often used as a benchmark for the health of the UK economy, it includes the 100 largest companies listed on the London Stock Exchange by market capitalisation. When you hear headlines about the stock market rising or falling, it’s usually referring to movements in the FTSE 100.

What Does FTSE Stand For?

FTSE stands for Financial Times Stock Exchange. The index was launched in 1984 as a joint venture between the Financial Times and the London Stock Exchange. Although the FTSE Group is now fully owned by the London Stock Exchange, the name has stuck.

How Is the FTSE 100 Calculated?

The index is weighted by market capitalisation, meaning companies with higher valuations have a greater impact on the index’s movement. The calculation takes into account only the free float portion of each company, which excludes shares not freely available for public trading.

Companies are reviewed quarterly. If a company’s market value drops or rises significantly, it may be removed or added during the review.

What Are the Other UK Indices?

Aside from the FTSE 100, there are several other UK indices worth knowing:

• FTSE 250: Tracks the next 250 largest companies after the FTSE 100

• FTSE All-Share: Combines the FTSE 100, FTSE 250, and smaller firms

• FTSE AIM: Covers smaller, more speculative companies listed on the Alternative Investment Market

Each index offers a different view of the UK market and suits different investment goals.

What Has the FTSE 100 Returned Over Time?

The FTSE 100 has historically returned between 6% and 8% per year on average, including dividends. Its performance can be influenced by currency movements, commodity prices and global economic trends, as many of its companies have international exposure.

While it hasn’t performed as strongly as some US indices like the S&P 500, it offers a steady income stream due to the high proportion of dividend-paying stocks.

How Can You Trade the FTSE 100?

You can’t buy the index directly, but there are several ways to gain exposure.

The most direct way is to invest in individual FTSE 100 companies. This gives you control over your holdings but also requires research and monitoring.

An easier and more diversified approach is to invest in a FTSE 100 tracker fund. These funds aim to replicate the performance of the index by holding all (or most) of its components in the same proportions.

Buying FTSE 100 Tracker Funds

Tracker funds are available from most UK investment platforms including Vanguard, Hargreaves Lansdown, AJ Bell and Interactive Investor. These funds are passive, meaning they follow the index without trying to beat it. They offer low fees and broad exposure.

Most trackers are offered as unit trusts or exchange-traded funds (ETFs). Both are suitable for ISA and SIPP accounts.

What Are Exchange-Traded Funds?

ETFs are investment funds that trade on stock exchanges like shares. A FTSE 100 ETF will mirror the index’s performance and can be bought or sold at any time during market hours.

They’re popular for their flexibility, low cost and simplicity. Well-known FTSE 100 ETFs include those from iShares, Vanguard and HSBC.

How Much Does It Cost to Invest in a FTSE 100 Fund?

Fees vary, but FTSE 100 tracker funds and ETFs typically charge between 0.05% and 0.20% per year. These are among the lowest fees in the investing world. Investing platforms may also charge account or dealing fees, so it’s worth comparing providers.

Because they’re passively managed, they tend to be much cheaper than active funds.

What’s the Difference Between an Index Tracker and a Managed Fund?

An index tracker fund simply follows a market index like the FTSE 100. A managed fund is run by a fund manager who tries to beat the market by selecting shares they believe will outperform.

Trackers are generally cheaper and more predictable. Managed funds have the potential to outperform but also carry a higher risk of underperformance and higher fees.

Final Thoughts

The FTSE 100 offers a reliable, diversified way to invest in the largest UK-listed companies. Whether you invest directly in its components or through a low-cost fund, it can form a strong foundation in any long-term investment portfolio.

It’s particularly suited to income investors, given the number of high-yielding companies it includes. If you’re looking to gain exposure to the broader UK economy with relatively low cost and effort, a FTSE 100 tracker fund or ETF is a sensible place to start.