Some people like to build a portfolio of individually selected FTSE 100 shares, while others are content to stick their money into a fund that tracks the index.
I tend to do the former. Indeed at the moment, I own a number of individual FTSE 100 shares such as JD Sports (LSE: JD), but no trackers.
Each investor is different, though. I see some pros and cons to using a FTSE 100 tracker instead of trying to build a portfolio by choosing individual blue-chip shares.
Keeping things simple
One straightforward reason many people plump for an index tracker is that they lack the time or inclination to try and build their own portfolio.
Doing that can involve taking a lot of time scouring the market for opportunities and digging into data about their business performance and prospects, such as their accounts.
Missing out on some brilliant individual opportunities – and some dogs!
Still, doing that can sometimes pay significant rewards.
Those could show up as part of a FTSE 100 tracker too – but as only one share among 100.
Take Rolls-Royce as an example.
Its 1,012% share price gain in five years has certainly helped FTSE 100 trackers. But it has been more lucrative for investors who own the share directly as part of a portfolio containing just a few FTSE 100 shares.
That cuts both ways, though. While a tracker by definition underperforms the best individual shares within it, it will outperform the dogs.
The Footsie’s up 47% in five years. Compare that to the 59% share price destruction seen in JD Sports in the same period.
One downside of a tracker may be that it is not heavily weighted to the top performers in the index. But an upside is that, unlike some portfolios or funds, it is not heavily weighted to the dogs either!
Index trackers can have attractively low costs
Another entry in the plus side of the ledger for trackers can be their cost structure.
It is difficult for individual private investors (or even large professional ones, come to that) to beat the market. That is one factor that helps explain why vast sums are poured into index trackers by investors.
With economies of scale and no need to employ costly fund managers, trackers can offer low fees compared to many actively managed funds.
Still, even modest fees and commissions can eat into returns, especially over time. So whether for a tracker or individually constructed portfolio of FTSE 100 shares, a tax-efficient structure like a Stocks and Shares ISA can be an appealing way to invest.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Time to sell?
So, given those pros and cons, why am I hanging onto my JD Sports shares instead of cutting my losses and putting the money into a FTSE 100 tracker instead?
Risks like weakening consumer confidence and rising logistics costs could hurt earnings at lots of FTSE 100 firms, including JD Sports. But the sportwear retailer’s dramatic underperformance in recent years reflects some specific risks too, like the unproven bottom line benefit of its massive store opening programme.
Still, that has given it global reach and economies of scale. It has a strong customer following and powerful brand.
The share’s performance lately has been disappointing. But as a long-term investor, I plan to hang on.
Christopher Ruane owns shares in JD Sports.
