Best Ways To Invest In FTSE 100

May 07, 2014

Last Friday the FTSE 100 topped a 9-week high at 6,838.17 and despite pulling back this week, the rally from mid-February could have pocketed you a pretty penny should you have been invested.

But, short of buying all the stocks yourself, which products are on offer?

While there are several ways to get exposure to the FTSE 100, the first decision to make is whether you want to take an active approach or a passive approach. You then need to make a decision around the investment vehicle – for example, in the passive space there are up to seven ways to get exposure to this index.

Here, we take a look at some of the different products on offer giving exposure to the FTSE 100 and what they could cost you.

ETFs

One good place to start when you are looking at passives is the legal risks.

Ursula Marchioni, head of iShares EMEA equity strategy & ETP research, said: “When you start looking at passives, such as index funds and exchange traded funds, it’s good to start by looking at the legal risks, as there are still structural differences to consider with both funds.”

ETFs are passive instruments that – due to the way they are structured - allow investors to access most underlying asset classes. They also have the added benefits of being cheap and able to trade throughout the day.

These characteristics make ETFs an attractive option when picking an investment product.

However, there are several things to look out for when picking an ETF.

Firstly, the cost of an ETF may vary.

The Vanguard FTSE 100 ETF is currently one of the cheapest on the market with a TER (total expense ratio) of 0.10 percent. It is physically backed and has roughly £765.50million in assets under management. However, the Source FTSE 100 ETF has a TER of 0.35 percent, which is a 0.15 percentage point difference in cost.

When looking at things like tracking difference and tracking error it is also important to ensure that you are looking at the right index. There is a FTSE 100 index that includes and excludes dividends. You want to make sure that you are looking at the index that includes dividends.

Peter Sleep, senior portfolio manager at 7IM, said: “When assessing tracking difference I think the longer the track record the better, so you can get an idea of how much a fund might drift.  The day to day volatility of the ETFs and trackers should all be identical given the underlying.  You do see differences though in the way funds represent volatility, but I think this arises from the mathematically different ways of calculating it.”

While ETFs are famed for their ability to trade intraday, which sets them apart from most other passive products, not all platforms in the UK have adapted to accommodate this.

“One of the benefits of ETFs is that they trade throughout the day, which offers the investor flexibility. However, platforms are still trying to fix the fact that they aren’t geared up to trade throughout the day. So a lot of these platforms still only have trackers,” said Marchioni.

This matter of costs charged by brokerage platforms may mean you don’t make savings on the actual cost of the ETF.

Sleep said: “Be careful of the platforms custodian charges.  These can add up and make holding any sort of FTSE 100 instrument, ETF or tracker, look very expensive.  Platform charges can be as high as 45bps for small investors – more than quintuple the best priced ETF or tracker.”

Marchioni also said that while UK equities are subject to a 50bps stamp duty, which is paid for creations by index trackers, when ETFs are purchased in the secondary market (on the stocks exchange), they don’t have to pay this.

However, Sleep argued that this is misleading “as the cost of stamp duty is often implicit in the premium to the fund’s iNAV e.g. today the Vanguard FTSE 100 ETF is trading at a 0.44 percent premium to iNAV, reflecting the stamp duty in the cost of creation.”

 

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