The FTSE 100, also known as the Financial Times Stock Exchange 100 Index, is a stock market index that measures the performance of the largest 100 companies listed on the London Stock Exchange (LSE). The FTSE 100 has been around since 1984 and is one of the most well-known stock market indices in the world.
In addition to its use as a benchmark, the FTSE 100 can also be used as a tool for active investors who wish to trade stocks that are included in the index.
In this article, we'll take a look at what makes up the FTSE 100 and how it's calculated. We'll also discuss some of the factors that can influence its price movements and the multiple ways traders can start gaining exposure. Before we discuss how to trade indices like the FTSE 100, let us have a look at what this index represents and the largest companies included in it.
The FTSE 100 index consists of the 100 largest companies listed on the London Stock Exchange (LSE) by market capitalisation. The index was created on January 3rd 1984 and had a value of 1000 points.
The index is maintained by the FTSE Group (trading as FTSE Russell), a subsidiary of the London Stock Exchange (LSE) Group.
While the FTSE 100 is a popular and widely followed index, it is a rather weak indicator of how the UK economy is performing, as the largest constituents are multinational corporations with an international focus. Investors trying to gain more exposure to the UK economy might prefer the FTSE 250 or FTSE SmallCap Index.
The FTSE 100 is an arithmetic weighted index and is calculated using the free-float market capitalisation of its constituents. This means that fluctuations in the share price of larger companies will have a greater impact on the value of the FTSE 100 than those of smaller companies.
Materials is the largest sector in the FTSE 100, making up almost 20% of the index. This is followed by Financials at 17% and Consumer Staples at 16%. Energy and Industrials come next at 12.4% and 8.7% respectively. Health care, consumer discretionary and communication services also have a notable weight in the index.
The top 10 companies in the FTSE 100 index are:
As of December 6th, the FTSE 100 is consolidating around 7170 points. Like all other stock indices, the FTSE 100 crashed in March 2020 due to the pandemic. The index has been slowly recovering since then, although it still did not manage to reach the pre-pandemic high while its US and most of its European peers managed to reach new record highs.
The FTSE 100 started at 1000 points in 1984. The index reached an all-time high of 7903 points in May 2018.
Contract for Difference (CFDs) is one of the ways traders can trade the FTSE 100 cost-effectively and efficiently. Generally, brokers offer a CFD based on the Cash Index (UK100) and a CFD based on the underlying Futures contract (FTSE100.fs).
When trading indices online using CFDs, traders can speculate on the direction of the underlying instrument (the FTSE 100) without owning it or any of its constituents. Traders can make use of leverage and will have the ability to go both long and short.
This can prove especially useful during a downturn. Most investors want to avoid a reshuffling of their portfolio as the costs can quickly add up and it is incredibly difficult to time the market correctly. Therefore, instead of selling a large part of a portfolio when traders anticipate a correction, CFDs could be used to speculate on falling prices.
Whether the Cash CFD (UK100) or Futures CFD (FTSE100.fs) will be more suitable to a trader, it will primarily depend on his trading style. If the trader holds positions for a short period of time, UK100 might be preferred as it has low spreads. On the other hand, if the is a long-term trader FTSE100.fs might be preferred as there are no swap charges.
Cash CFDs have lower spreads and are more suitable for short-term traders, while Futures CFDs are popular amongst position traders as no daily swap fees are charged. Traders should note that futures CFDs are subject to a rollover. A rollover is when a trader moves their position from the front-month contract (close to the expiration date) to another contract date in the future, to avoid the costs or obligations associated with the settlement of the contracts. Contract rollovers are profit neutral.
Exchange Traded Funds (ETFs) are the easiest way to invest in the FTSE 100 index. It is more cost-effective than buying the individual shares and the rebalancing is done quarterly.
While ETFs can be leveraged too, it will usually have less flexibility than trading CFDs. However, if a long-term investor and don't really want to actively trade the product, ETF might be found as an efficient solution.
There is a variety of ETFs available from different providers. When choosing an ETF, traders should go through the factsheet that is provided by the broker and become familiar with the specifications of the product and the charges involved.
The largest FTSE 100 ETFs are (by AUM) are:
The cheapest FTSE 100 ETFs (by TER - Total Expense Ratio) are:
There are a few things that move the FTSE 100, the main ones are listed here:
The FTSE 100 has achieved an annualised return of 4.8% over 5 years. As we can see from the FTSE 100 index factsheet, the FTSE 250 and the FTSE SmallCap have outperformed the FTSE 100, although investors must take into consideration that both indices have higher volatility.
The performance of the FTSE 100 is far from impressive when compared to some of its international peers - such as the Dow Jones in the United States or the DAX in Germany. Brexit and the COVID-19 pandemic are certainly two major factors that have weighed on the performance of the FTSE 100.
However, it is a fact that the FTSE 100 heavyweights consist of large companies in traditional industries such as pharmaceuticals, banking, mining and oil & gas. There are very few IT companies that could have made up for the poor performance of certain sectors such as financial services and oil & gas.
While the FTSE 100 is fairly stable and its constituents distribute solid dividends, investors looking to gain exposure to the UK stock market might also consider other indices such as the FTSE 250 and the FTSE Small Cap.
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