Returns from the FTSE 100 index have been strong in recent years, supported by chunky dividends. This puts to bed the notion that the Footsie is a desolate wasteland of perpetual low returns.
For evidence, consider that a £7,000 investment made five years ago in a FTSE 100 index fund that reinvests dividends would be worth roughly £12,500 today. That’s an annualised return of approximately 12.2%.
Admittedly, that’s far higher than the historical average. But even someone who invested a decade ago would have pocketed a solid return. By now, the seven grand would have more than doubled, becoming almost £16,500 (before fees).
With the cost of living rising relentlessly, such inflation-beating returns are more important than ever.
Could it have been even higher?
Remember, these are market averages. Had someone instead picked a portfolio of individual shares, including some top-performers, the returns may have been much higher.
To see why, take a look at the 10 best-performing FTSE 100 stocks from the past decade:
| 10-year return (before dividends) | Description | |
| Games Workshop | 4,130% | Warhammer maker |
| Polar Capital Technology | 859% | Investment trust |
| Diploma | 738% | Industrial components |
| Antofagasta | 583% | Chile-based miner |
| Lion Finance | 552% | Georgia-based bank |
| Computacenter | 515% | IT and tech services |
| Rolls-Royce | 432% | Engine maker |
| Scottish Mortgage | 375% | Investment trust |
| Airtel Africa | 349% | Africa-based telecoms |
| 3i Group | 342% | Investment trust |
It’s worth mentioning that these numbers don’t include dividends. Add those in, the returns shoot even higher!
Of course, it’s impossible to know in advance which shares will become the best performers. But just a couple of these could have significantly boosted a portfolio, resulting in major outperformance.
A hedge against AI volatility?
Lately, the FTSE 100 has also acted as a bit of a hideout from AI volatility across the pond. For example, on Friday (17 July), the tech-dominated Nasdaq-100 and S&P 500 indices fell 1.5% and 1%, respectively, as semiconductor stocks slumped.
By contrast, the FTSE 100 actually edged higher due to its low tech exposure. And while it wouldn’t emerge totally unscathed from a proper AI/chip stock meltdown at some point, it’s likely to hold up better than tech-heavy indices.
An ETF to consider buying
Investors interested in the FTSE 100 index could consider the iShares Core FTSE 100 ETF (LSE:CUKX). This version reinvests dividends back into the fund.
The top five holdings today are HSBC, pharma giant AstraZeneca, Shell, Rolls-Royce and consumer goods titan Unilever. This globe-trotting quintet makes up roughly 33.5% of the ETF, so there’s heavy concentration at the stock level, which adds risk.
Indeed, that’s actually more than the S&P 500, where the top five ‘only’ account for around 28.5%. However, while the S&P 500 has a heavy weighting to a single industry (technology), the top of the FTSE 100 is spread across different sectors.
Again, this makes it far less exposed to a tech stock crash.
Another thing I like is that the index isn’t particularly expensive today. The price-to-earnings (P/E) ratio is 17.6, versus 30.3 for the S&P 500, and the starting dividend yield is a respectable 3%.
Meanwhile, the few Footsie tech stocks it does hold look great value. Sage and RELX are trading at P/E multiples of 21.4 and 22.3, falling to 15.2 and 16.7 on a forward-looking basis.
To conclude, I reckon this passive FTSE 100 index tracker is worth considering for a portfolio, alongside hand-picked individual shares. There are plenty of ideas here at The Twelfth Magpie.
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Ben McPoland owns shares in 3i Group, AstraZeneca, Games Workshop, HSBC, Rolls-Royce, Sage, and Scottish Mortgage.
