The Vanguard S&P 500 UCITS ETF (LSE: VUSA) is quite a popular investment in the UK. With this tracker fund, investors can get one-click access to a broad range of US stocks. I think it’s smart to have plenty of exposure to the US stock market as, historically, it has outperformed the UK market. But should I buy VUSA stock for my portfolio? Let’s take a look.

What is VUSA?

VUSA is an exchange-traded fund (ETF) that tracks the S&P 500 index. This index consists of 500 large companies listed on stock exchanges in the US.

At present, the top 10 holdings in the S&P 500 are:

Advantages of the fund

There are a number of things I like about VUSA. Firstly, it provides access to many world-class companies. With this ETF, I can get exposure to the likes of Apple, Amazon, and Alphabet (Google). These are some of the most dominant companies in the world. On the London Stock Exchange, we don’t have huge companies like this.

It also provides great exposure to the technology sector. At the end of October, tech represented about 26% of the S&P 500 index (versus 0.9% for the FTSE 100). As a long-term investor, this is a sector I want to have plenty of exposure to, as the world is only going to become more digital.

Additionally, it provides diversified exposure to the US market at a low cost. As an ETF, VUSA trades just like a regular stock. So the only fees I’ll pay to buy and own it are my standard brokerage fees (trading fees and custody fees). This means it will most likely be more cost effective than owning a non-ETF index fund or an actively-managed fund.

Finally, I also like the fact that as an ETF, its price changes during market hours (versus actively-managed funds which typically are only priced once a day). This feature could allow me to be nimble when it comes to buying and selling my units. For example, the S&P 500 recently fell to near-3,500 before ripping back up above 3,650 that same day. If I’d been on my toes, I could have got in near the 3,500 mark with VUSA. I couldn’t have done that with an actively-managed fund.

Disadvantages

Of course, VUSA has its disadvantages too. Buying a broad ETF like this doesn’t give me any control over the stocks I’m buying. I’m forced to own all the stocks within the S&P 500. So for example, if I want to avoid oil stocks like Chevron, I can’t. I like picking individual stocks myself as it gives me more flexibility.

Secondly, the S&P 500’s heavy allocation to technology means this ETF could be quite volatile. We’ve seen this in 2022. This year, VUSA has had some wild swings.

Should I buy VUSA stock?

So would I buy VUSA stock today? Well, the thing is I already own shares of Apple, Amazon, Microsoft, Alphabet, and a number of other US-listed companies. So if I invested in VUSA, there would be a fair bit of overlap.

So, for now, I won’t be buying it. However, if starting an investment portfolio from scratch today, I would definitely consider it. I think it could be a good core holding.

The post Should I buy VUSA stock for my portfolio? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Ed Sheldon has positions in Alphabet (C shares), Amazon, Apple, and Microsoft. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Microsoft, and Tesla. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Making regular passive income must be the ultimate lifestyle improvement tip when it comes to finances. It’s no wonder it’s become more popular these days, helping people have that little bit extra money for whatever they want it for.

For me, my dream was to retire early and spend time doing what I love, not just what pays the bills. And it was only through creating enough passive income that I was able to do so.

But, it can be tricky to find the right investments for my portfolio. These are two of my favourites that both play their part in letting me live my life how I choose to.

A growing dividend stable earner

City of London Investment Group (LSE: CLIG) have long been one of my favourite shares that I hold. I first bought this back in 2013 and every year since it’s paid out a chunky dividend. In fact, it’s grown by 9% on average since it started paying a dividend in 2007.

At the moment, it’s still trading down about 15% year to date, giving a historic-based dividend yield of around 7.8%.

If I didn’t already own plenty of these shares in my portfolio, I’d be happy to top up again.

A passive income diversified ETF

Next up, one of my favourite footsie-based ETFs, the not-so-catchily named iShares UK Dividend UCITS ETF (LSE: IUKD).

When I’m looking to live off my passive income portfolio, stability is good. And one way for me to achieve that is through this ETF. That’s because it invests in the top 50 individual high-yielding shares in the FTSE 350 after some basic screening.

If one company runs into issues and decides to cut their dividend, the average dividend yield will fall slightly. That’s much more manageable for me in terms of cash-flow than suddenly receiving nothing.

True, it comes with a slight cost for that benefit, but at 0.4% I think it’s reasonable for what I get.

Currently, it’s returning a potential dividend of around 6%, which I consider pretty good for something with those diversification upsides.

Again, it’s another I’d be happy to add to if I didn’t already own enough for my portfolio.

Playing the long game

At this point, you may be wondering if I’ve simply cherry-picked the passive income investments that have worked out best for me to make this article sound good.

The truth is, no, I own others that worked out better. And there are also those that turned out worse. The honest answer is that not all shares will work out — and that’s okay.

Because that’s why owning a diversified portfolio and holding onto it over the long term was the number one most important thing I did.

It was fundamental for growing my wealth in the first place. And then for turning that wealth into a passive income portfolio I now live off.

After all, I’m all about putting your money where your mouth is. And these tips helped me do exactly that.

The post WARNING! These passive income ideas seriously changed my life! appeared first on The Twelfth Magpie.

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Michelle Freeman has positions in City of London Investment Group and iShares UK Dividend UCITS ETF. The Motley Fool UK has recommended City of London Investment Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here, I’m going to highlight some of my favourite ETFs for 2021. I think these index funds could help investors build a winning portfolio.

ETFs for 2021

As a UK investor, I think it’s really important to take a global approach to investing. The UK has some great companies. However, many of the world’s most dominant companies are listed internationally.

One of my favourite ETFs for global equity exposure is the iShares Edge MSCI World Quality Factor UCITS ETF. It’s listed under tickers IWQU (USD) and IWFQ (GBP).

What’s unique about this ETF is that instead of just tracking the entire MSCI World (which contains about 1,600 companies), it provides exposure to a selection of high-quality companies within the index. Specifically, it invest in companies that:

• Demonstrate strong and stable earnings

• Have low debt levels

• Allocate a high percentage of company earnings to shareholders

This focus on quality can protect against downside risks. When the MSCI World index generated negative returns in 2015 and 2018, for example, this ETF outperformed. Meanwhile, it has been a solid performer over the last five years, returning 11.2% per year for the five years to 30 November versus 10.7% per year for the MSCI World.

Top holdings currently include Apple, Microsoft, Nike, Visa, Roche, and Nestle. Its ongoing charge is 0.30% per year.

I also like the US version of this ETF – the iShares Edge MSCI USA Quality Factor UCITS ETF. This provides exposure to large- and mid-cap US stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage). Companies in the top 10 holdings currently include Apple, Coca-Cola, Nike, Mastercard, and Johnson & Johnson. This ETF returned 13.4% per year for the five years to 30 November. Fees are just 0.15% per year.

A sustainable exchange-traded fund

Sustainable investing has become popular in recent years as investors have become more concerned about where their money is being invested. In 2020, flows into sustainable ETFs smashed records.

One sustainable ETF I hold in high regard is the iShares MSCI World SRI UCITS ETF. This index fund aims to provide access to the global markets through companies with outstanding environmental, social, and governance (ESG) ratings and minimal controversies. Specifically, it screens out companies involved in industries such as oil & gas, weapons, tobacco, and gambling.

Since its launch in October 2017, this ETF’s done well. For the year to 30 November, it returned 19.3%. For the three years to 30 November, it returned 12.45% per year.

Top holdings currently include Microsoft, Tesla, Procter & Gamble, and Nvidia. Fees are 0.2% per year.

A technology ETF for 2021

Finally, I remain bullish on the long-term prospects for the technology sector. I think it’s smart to have exposure to a pure-play tech ETF.

One of the best ways to gain exposure to the tech sector in my view is to invest in the iShares NASDAQ 100 UCITS ETF. This tracks non-financial stocks listed on the Nasdaq stock market. Its top holdings currently include Apple, Microsoft, and Amazon. Ongoing charges are 0.33% per year. I think this ETF should do well as technology plays an increasingly important role in our lives.

The post 4 ETFs I’d buy for 2021 and beyond appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Apple, Amazon, Microsoft, and Mastercard, and has a position in the iShares Edge MSCI USA Quality Factor UCITS ETF. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Apple, Mastercard, Microsoft, Nike, NVIDIA, Tesla, and Visa. The Motley Fool UK has recommended Johnson & Johnson and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today — 14 months later — I’m taking another look. 

Greatland Gold: a lucky punt?

Now, let’s be clear from the outset — there was an awful lot of luck in my call. Investing in any miner, let alone a minnow, is fraught with risk.

First, there’s no guarantee it’ll find what it’s looking for, or be able to extract sufficient quantities of what it does find to make the business profitable. Second, mining can be an expensive business. Many companies go bust before they’ve a chance to make their mark. Third, miners have no control over the prices of the commodities they extract. Fourth, mining shares have a tendency to ‘pop and drop’, catching unwary investors on the price spike.

All that said, Greatland Gold has certainly done all it can to put itself in a great position to continue rewarding investors. Recent news has only served to boost the investment case further.

Good progress

In August, the company announced it has commenced drilling at its delightfully-named Scallywag prospect in the Paterson region of northern Western Australia.

As CEO Gervaise Heddle commented, many of the targets in this region “display similar geophysical characteristics” to Greatland’s stunning Havieron gold-copper discovery “where ongoing drilling under a Farm-in with Newcrest has returned a series of outstanding results.” This certainly bodes well. 

Speaking of Havieron, the company has also announced it had secured a mining lease relating to the project. Assuming GGP is able to get it into production, this could eventually become one of the most valuable gold mines in the world.

On top of this progress, Greatland Gold has benefited hugely from the surge in the price of the precious metal since the coronavirus struck. Despite coming off the boil in recent months, the value of gold has still soared around 25% since the beginning of 2020!

Sell or hold?

Regardless of whether the GGP share price would be where it is in the absence of the pandemic, the fact remains that a lot of early holders will be sitting on big profits. What now? 

For me, an optimum strategy for existing owners might be to bank some profit and keep the rest invested.  After all, such an incredible return over such a short period shouldn’t be taken for granted. Greatland Gold remains a company in its infancy and a lot could still go wrong. Notwithstanding, keeping some money invested will allow holders to benefit from any further positive news on drilling. 

Naturally, no one knows where the gold price will go in the short term either. Since there are simply too many factors that could impact sentiment, one potentially great destination for GGP profits, in my opinion, would be VanEck Vectors Junior Gold Miners ETF.

Diversified across 80 small- and mid-cap miners, this fund ensures investors have exposure to the gold price without the risk the comes from owning just one stock. The ongoing charge is a reasonable 0.55%. 

The post The Greatland Gold share price is up 1,200%! My call was right, so what would I do now? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, it pays to be selective when it comes to investing in ETFs. Some are likely to provide much stronger returns over the long run than others. With that in mind, here’s a look at three of my top picks available to UK investors.

The best ETFs to invest in

One of my favourite ETFs is the iShares Edge MSCI World Quality Factor UCITS ETF. This is a global equity product that provides exposure to 300 companies within the MSCI World index.

What’s unique about this particular exchange-traded fund is that instead of just tracking a regular stock market index such as the FTSE 100, it provides exposure to a selection of high-quality companies listed around the world. Specifically, it invests in companies that:

• Demonstrate strong and stable earnings

• Have low debt levels

• Allocate a high percentage of company earnings to shareholders

This is an excellent investment strategy, in my view. In theory, the strategy should provide an element of protection in the event of a market downturn.

This fund is listed on the London Stock Exchange under tickers IWQU (USD) and IWFQ (GBP). Its ongoing charge is 0.30% per year. I think it’s one of the best ETFs to buy for broad global equity exposure.

Source: iShares.com

A sustainable investing ETF

Sustainable investing has become increasingly popular in recent years and it’s not hard to see why. This form of investing seeks to deliver a healthy financial return while also considering environmental, social, and governance (ESG) factors.

One ETF I hold in high regard in this area is the iShares MSCI World SRI UCITS ETF (ticker SUWS). This product aims to provide access to the global markets through companies with outstanding ESG ratings and minimal controversies. Specifically, it screens out companies involved in the oil & gas, weapons, tobacco, firearms, alcohol, and gambling industries.

This fund was only launched in October 2017, so it hasn’t been around for that long. However, in that time, it’s delivered very solid returns. I think it has a lot of potential in a world that’s increasingly focusing on sustainability. Ongoing charges are 0.20% per year.

Source: iShares.com

An exchange-traded fund for the digital revolution

Finally, I think it’s smart to have a decent level of exposure to the technology sector. Technology companies are having a huge impact on the world at the moment, and look set for big growth in the years ahead.

One of the best ways to invest in technology, in my view, is through a simple NASDAQ 100 tracker, such as the iShares NASDAQ 100 UCITS ETF. This will provide exposure to all the major players listed on the technology-focused NASDAQ stock exchange, such as Apple, Amazon, and Alphabet (Google).

You can find this particular ETF on the London Stock Exchange under ticker CNDX. Ongoing charges are 0.33% per year.

I’ll point out that technology stocks have had a great run recently. Some areas of the technology sector do look a little overheated. I’d be looking to buy this fund when we next see a market pullback.

Source: iShares.com

The post Investing: I think these are some of the best ETFs for 2020 and beyond appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Apple and Alphabet. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, and Apple and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With that in mind, I want to highlight one of my favourite ETFs right now. If I could only buy one in 2020, this would be it.

A focus on quality

The iShares Edge MSCI World Quality Factor UCITS ETF is a global equity ETF that provides exposure to 300 companies within the MSCI World index. It’s listed on the London Stock Exchange under tickers IWQU (USD) and IWFQ (GBP) meaning you can invest in it easily through online brokers such as Hargreaves Lansdown. Its ongoing charge is 0.30% per year.

What I like about this particular ETF is instead of just tracking an index such as the FTSE 100 or the MSCI World, it provides exposure to a portfolio of ‘high-quality’ companies. It does this by selecting companies that:

• Demonstrate strong and stable earnings

• Have low debt levels

• Allocate a high percentage of company earnings to shareholders

So what you’re ultimately getting is exposure to a diverse selection of leading companies with strong balance sheets, are able to generate relatively consistent earnings, and treat shareholders well. 

World-class companies

Looking at the full list of holdings (which can be found on the iShares website), there are some fantastic businesses in the portfolio. Not only does the ETF have exposure to some of the most attractive companies in the FTSE 100, such as Unilever, Diageo, and AstraZeneca, but it also has exposure to the likes of Apple, Nike, and Visa, which are all listed in the US, and Roche and Adidas, which are listed in Europe. It’s an excellent mix of companies, in my view.

Top 10 Holdings 

Source: iShares. Data as of 17/02/20. 

Good performance

The performance of the iShares Edge MSCI World Quality Factor UCITS ETF since its inception in 2014 has been very good. For example, for the five years to 31 January, it returned 9.96% per year (in USD terms). By contrast, the FTSE 100 returned 5.8% year.

It’s worth noting it did underperform the S&P 500 over the five years to 31 January (which returned 12.37%), but that’s mainly because it has more balanced sector exposure compared to the S&P (i.e. slightly less exposure to technology), which is a good thing from a risk-management perspective.

Downside protection

I’ll point out that I’d expect this ETF to potentially outperform in a bear market, due to the fact the companies in the portfolio have been selected for their robust balance sheets. These kinds of companies tend to hold up a little better when markets are falling.

Overall, there’s a lot I like about this iShares ETF. I see it as a cost-effective way to get exposure to a portfolio of world-class companies that have strong and stable earnings.

The post If I could only buy one ETF in 2020, this would be it appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Hargreaves Lansdown, Unilever, Diageo, and Apple. The Motley Fool UK owns shares of and has recommended Apple, Nike, Unilever, and Visa. The Motley Fool UK has recommended AstraZeneca, Diageo, and Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, the rise of exchange-traded funds (ETFs), or index/tracker funds, in recent years has completely changed investing. Through an ETF, you can get exposure to a whole market or index with just one security at a very low cost.

Is investing through an ETF a better idea than picking stocks though? Let’s take a look at each strategy.

Index investing

ETFs offer investors a number of benefits. For a start, they make investing a very simple process. Through just one security, you can get exposure to a whole index, whether that’s the FTSE 100, the S&P 500, or the China Shanghai Composite index. Given that it’s very hard to consistently beat the market, buying the market itself through an index fund makes a lot of sense.

The other main advantage of tracker funds is their cost structure – fees are generally very low. For example, through online broker Hargreaves Lansdown, you can invest in the Legal & General UK Index fund – which tracks the FTSE All-Share index – for just 0.04% per year. Keeping your fees low is important when investing in the stock market, so tracker funds have considerable appeal from a cost perspective.

On the downside, however, index funds provide you with very little flexibility as you’re forced to own every stock in the index you’re tracking. Not a fan of companies that manufacture weapons? If you own a FTSE 100 or S&P 500 tracker, you’ll have exposure to them.

The other drawback of index funds is that, by definition, you will never ever beat the market. That may not be an issue when the market is rising, but what about if the market is falling, or trades sideways for a decade?

Picking stocks

Stock picking also has its pros and cons. One of the big advantages of picking your own stocks is that it gives you flexibility. If you want to construct a portfolio that has a higher yield than the index, you can. If you want to avoid tobacco stocks for ethical reasons, that’s easily done. When you’re picking your own stocks you have far more control over your portfolio.

Picking your own stocks also provides the potential to generate life-changing returns. For example, had you invested $5,000 in Amazon a decade ago, that investment would now be worth around $114,000. Of course, not every stock performs this well, but the point is you’re not going to get those kinds of returns from index investing.

On the downside, stock picking does require time and effort. It takes time to thoroughly research companies, and you need to have a basic understanding of investing as well.

Ultimately, both strategies have their advantages and disadvantages. If you don’t have much of an interest in investing and you’re simply looking for exposure to the market at a low cost, an index fund could be a great choice. On the other hand, if stocks do interest you, and you think you could potentially beat the market, stock picking could be a good option.

The post Picking stocks vs index funds. What’s the best investment strategy? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Hargreaves Lansdown. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, FTSE 100 trackers do have their flaws. Here’s a look at three reasons why they may not be the best place for your retirement savings.

A poor long-term performer

Tracker funds, in general, can be very effective investments due to the fact they provide investors with broad exposure to the stock market and eliminate fund manager fees. However, to borrow a line from Phil Oakley at Investors Chronicle, tracker funds are only good investments if the “index that you are trying to track is any good.”

Stop and think about the FTSE 100 itself for a minute. This is an index that has hardly gone anywhere in 20 years. In late 1999, it was trading just below 7,000 points. Today, it trades near 7,500 points – a gain of less than 10%.

Yes, dividends have added significantly to overall returns, but it’s hard to deny it’s been a poor long-term performer. By contrast, the S&P 500 index has more than doubled over the same time period.

Why has the FTSE 100 been such a sluggish performer? In short, it’s due to the fact many of its top constituents are low-growth companies. For example, Footsie oil companies, banks, and tobacco companies are all struggling to grow at present. This isn’t likely to change any time soon, so if you’re buying a FTSE 100 tracker, you need to be prepared for low returns going forward.

Low-quality companies

Another reason FTSE 100 trackers may not be the best investment choice is there are a number of ‘low-quality’ companies within the index that could hamper returns. By low-quality, I mean companies with high debt levels and low levels of profitability.

For example, BT Group is saddled with debt and has a huge pension deficit. Vodafone just slashed its dividend. Tesco is facing significant pressure from the likes of Aldi and Lidl. There are many more examples. And in an index of just 100 companies, individual stocks can have a significant negative impact if they underperform.

Muted dividend growth

Finally, while the FTSE 100 does offer a relatively attractive dividend yield of 4.3% right now, dividend growth could be limited in the years ahead. Footsie companies such as Shell, HSBC and GlaxoSmithKline haven’t lifted their dividends for years and look unlikely to lift their payouts significantly (if at all) in the near term. As such, dividend growth from a FTSE 100 tracker going forward could be relatively low.

A better strategy? 

One way around these issues is to put together a portfolio of high-quality FTSE 100 dividend growth stocks. By focusing on companies that are growing their profits and continually increasing their dividend payouts, you could build yourself a portfolio which not only outperforms the FTSE 100 over time, but also generates an income stream that rises by 5-10% per year.

In summary, while there are benefits of investing in FTSE 100 trackers, there are certainly also drawbacks. Ultimately, you could be better off constructing a portfolio of high-quality FTSE 100 stocks and aiming to outperform the index.

The post 3 reasons a FTSE 100 tracker may NOT be the best place for your retirement savings appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Royal Dutch Shell and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended HSBC Holdings and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, a lot of people don’t even know what FTSE 100 tracker funds are or how they work. If you’re in this boat, don’t stress. Here, I’ll explain what they are, how they work, and how to invest, and I’ll also examine the pros and cons of investing in them.

What is a FTSE 100 tracker fund?

A FTSE 100 tracker fund is a low-cost investment fund that tracks the performance of the UK’s main stock market index – the FTSE 100. This index is made up of the 100 largest companies in the UK and includes names such as Royal Dutch Shell, HSBC, and Lloyds Bank.

How does a FTSE 100 tracker work?

When you’re invested in a FTSE 100 tracker, your money will rise and fall in sync with the FTSE 100, minus a very small amount for fees.

So, for example, if the Footsie rises 10% for the year, your investment will rise close to 10% too. However, if the index falls by 5% in a month, your capital will decrease in value by around 5%.

How do you buy a FTSE 100 tracker?

To buy a FTSE 100 tracker, you’ll need a share trading account with a broker such as Hargreaves Lansdown or AJ Bell. Your account could be a regular trading account, an ISA, or a SIPP. FTSE 100 tracker funds trade like regular stocks, which means you’ll pay a commission fee of around £10 each time you buy and sell units.

You can invest as much or as little as you want into a FTSE 100 tracker. However, with commissions setting you back roughly £10 per trade, there’s not really much point investing small amounts, such as £50 or £100, as you’ll lose a fair chunk of your money to trading costs. You’re better off stockpiling your money until you have at least £500 saved before investing.

FTSE 100 trackers: a good investment?

To answer this question, let’s look at some of the advantages and disadvantages of FTSE 100 tracker funds.

Advantages:

• You get exposure to 100 companies which lowers your risk

• You get exposure to some world-class companies

• The FTSE 100 has a strong dividend yield meaning you’ll receive regular income 

• Fees are very low

Disadvantages:

• You only get exposure to UK-listed stocks meaning you won’t get exposure to the likes of Apple, Google, or Amazon

• You get exposure to some low-quality companies

• You will never beat the market, as you’ll always receive the return of the FTSE 100 minus a small fee

Weighing up these pros and cons, a FTSE 100 tracker funds will be suited to some investors more than others. For example, if you’re just starting out in the world of investing and looking to build a portfolio from scratch while keeping costs low, a FTSE 100 tracker could be a great place to start.

However, if you’re a more advanced investor and you’re looking to beat the market, I believe you may be better off constructing a portfolio that consists of a number of high-quality companies and top-performing funds.

Ultimately, the answer to this question comes down to your personal goals, requirements, and risk tolerance.

The post What are FTSE 100 tracker funds and are they a good investment? appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in Royal Dutch Shell, Lloyds Banking Group, Hargreaves Lansdown, Apple, and Alphabet. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, and Apple. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool UK has recommended Hargreaves Lansdown, HSBC Holdings, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Is this a good investment strategy though? Let’s take a closer look at some of the advantages and disadvantages of owning a FTSE 100 tracker fund.

Advantages

There are a number of advantages, of course. For starters, with a FTSE 100 tracker, you’ll get instant exposure to the UK’s largest listed companies. Through one purchase you’ll get exposure to the likes of Royal Dutch Shell, HSBC and GlaxoSmithKline. You’re therefore getting exposure to some blue-chip companies that have been around a long time.

Second, investing in a FTSE 100 ETF provides you with instant diversification because the Footsie has 100 companies. As such, you don’t need to worry about stock-specific risk.

Third, the FTSE 100 does generally offer an excellent dividend yield. Right now, the forecast yield is around 4%, so you’re likely to pick up both capital gains and income over time from a tracker fund.

Disadvantages

However, there are also a number of disadvantages associated with a FTSE 100 tracker fund.

Firstly, while you’ll get exposure to some fantastic, world-class companies when you buy a FTSE 100 ETF, you’ll also be getting exposure to some lower-quality companies. For example, the index contains a number of stocks with high levels of debt. Do you want to be owning these companies?

Second, the FTSE 100 is a slow-moving, lethargic index. Look at a long-term chart, and you’ll see that it has literally gone nowhere in 20 years. One of the key reasons for this is that the Footsie has minimal technology exposure. This is a major flaw of the index, in my view. With the FTSE 100, you’re not going to get exposure to dominant global tech players such as Amazon, Apple and Netflix (that are having a big impact on the world).

Third, if you have ethical beliefs, you’re going to have problems investing in a FTSE 100 tracker. ‘Sin stocks’ such as tobacco and alcohol? The FTSE 100 has a number of them. Defence companies that make warships and missiles? They’re in there too. A tracker fund doesn’t give you much investing flexibility.

Finally, by definition, you’re never going to beat the market by investing in a tracker fund. If the FTSE 100 falls, your investment will fall too. If the FTSE 100 returns 2% for the year, your money will grow by 2% too (slightly less when you factor in fees). While that’s likely to suit some people, here at The Motley Fool, we believe that it’s not that hard to beat the market over time with the right mix of stocks and funds.

So, overall, while a FTSE 100 tracker does offer some advantages, it’s not the perfect investment. Ultimately, if you’re looking to generate a higher return on your money, putting together a portfolio of individual stocks and/or specialist funds, may be a better move than investing in a FTSE 100 ETF.

The post Is a FTSE 100 tracker fund a good investment? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Royal Dutch Shell, GlaxoSmithKline, and Apple. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Apple, GlaxoSmithKline, and Netflix. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.