FTSE 100: A British Index, Priced Abroad
The FTSE 100 is an index of the hundred largest companies by market value listed on the London Stock Exchange. Most of their revenue is earned outside the United Kingdom, so the index behaves less like a bet on the British economy than its name suggests.
How it works
Membership is by market value among companies listed in London. The constituents are reviewed quarterly, and companies enter and leave as their size changes relative to the rest.
Listing location and earnings location are different things. The index contains oil majors, global miners, international banks and consumer goods companies selling worldwide. Where the shares are quoted tells you almost nothing about where the profits come from.
That produces a counterintuitive currency effect. Earnings made in dollars translate into more pounds when sterling falls, so the index often rises on domestically bad news. An index that goes up when the currency goes down is not measuring national economic health.
The sector mix is the index’s real character. Extraction, finance and established consumer brands dominate — mature, cash-generative businesses in cyclical industries.
What that mix produces
The technology weight is small, and that explains most of the comparisons people make. When commentators note the index lagging others over a period, the composition is usually the whole explanation.
Mature businesses distribute rather than reinvest. That produces a higher aggregate dividend and slower price growth — not a defect, a different shape of return.
And the quoted level is a price index. It leaves out the income, which for this particular index is the larger share of the long-run return. Comparing its headline chart against a total-return figure elsewhere is comparing two different quantities, and it happens constantly.
In practice
Owning it means owning a fund, and the fee compounds. On this site’s arithmetic, 5 basis points a year removes 1.5% of a thirty-year pot and 75 removes 20.2% — before any question of tracking.
Liquidity is concentrated. The largest constituents account for a disproportionate share of both the index value and the trading, so the index is more exposed to a handful of companies than “one hundred” suggests.
Its price history contains multi-year periods of no progress. During those, the dividend was the entire return, which is the practical consequence of the composition described above.
The opening level reflects overnight moves elsewhere. With globally exposed constituents, the opening gap frequently prices news that arrived while London was closed.
The index itself is a calculation. A stop belongs to whatever instrument you hold against it, not to the number.
Trading it costs the usual amount. Every round trip pays a spread and a commission, and for a slow-moving index that toll is a meaningful share of an ordinary day’s movement.
Reading it without being misled
Ask what fraction of constituent revenue is domestic before calling it a country bet. For this index the answer is the reason most commentary about it is confused.
Then use the total-return version for any comparison. The price index and a total-return index answer different questions, and the difference over a decade is large. If a chart does not say which one it is, assume it is the price index, because that is the one quoted on the news.
And look at the sector weights before attributing performance to a country. An index heavy in extraction did what commodity prices did; that is composition, not national economics.
The quarterly review, and why it moves prices
Membership is recalculated every quarter against published rules. A company whose value has risen above a threshold enters; one that has fallen below another leaves. The rules are known in advance and so, roughly, are the likely changes.
Every tracking fund must then trade the same names on the same day. A share entering the index is bought by all of them at once, and one leaving is sold by all of them at once, regardless of what anybody thinks it is worth. That is a large, scheduled, price-insensitive flow, and it is the clearest example of index mechanics affecting prices rather than reflecting them.
Which is why inclusion and removal are followed closely by people who never trade the index itself. The move often begins when the change becomes probable rather than when it takes effect, and it can partially reverse afterwards once the mandatory buying is done.
What the FTSE 100 is not
It is not the British economy. The earnings are global.
It is not a total return. Dividends are excluded.
It is not diversified by sector. A few dominate.
And it is not directly investable. You buy a fund.
How this connects
The US comparison it gets measured against is usually the Nasdaq. That index is dominated by technology, so the gap between the two over most periods is a sector story before it is a country story.
The currency effect is exchange rate risk turned inside out. A British holder of a dollar-earning company gains when sterling falls, while an overseas holder of the index takes on currency risk in the opposite direction.
The income bias shows up in the dividend yield, which is why the index appears so often in income investing portfolios and in value investing screens built around mature, cash-generative businesses.
Most people own it through an ETF or tracker, where the expense ratio and the tracking error together decide how close the holder gets to the index’s own return.
For UK savers the usual wrapper is a stocks and shares ISA, and holding the index there is a common first step in passive investing.
Its concentration in a few large names is concentration risk by another label. Pairing it with international diversification or a sector ETF outside extraction and finance changes the portfolio’s character far more than adding more London names does.
And index-level trading happens through a futures contract or a derivative, most actively during the London session.
When it fails
In a flat decade the price index shows nothing and the holder still earned. Which is exactly the situation in which the headline number misleads most, and it has happened more than once.
The second failure is treating it as a domestic proxy. The currency effect runs the other way.
A third is comparing its price chart to another index’s total return. Different quantities: one leaves out dividends and the other reinvests them, and on a high-yield index that gap is large.
A fourth is assuming a hundred names means diversification. The weightings are concentrated.
A fifth is buying it for growth. The composition is built for income.
And a sixth is ignoring the fee on the fund. It is the one certainty in the whole arrangement.
The original data
Of the 24,971 videos collected for this site’s search study, 3 have “ftse” in the title, at a median of 99 views across 2 channels, with a maximum of 599. “Index fund” appears in 132 at a median of 69,951. Each video is counted once, even when several searches returned it.
The question: The price index is flat for years. A lost decade?
Three videos and a median of 99 views is one of the smallest audiences recorded on this site. It is a straightforward consequence of where the trading-content audience is: this corpus is overwhelmingly American, and a British index draws essentially nobody. Worth stating plainly, because it means the absence of coverage here says nothing about the index and everything about the sample.
The answer to that final question is that a flat price index is not a flat return. Add the income back and the decade usually looks quite different. Find the total-return series before concluding anything — for an index composed of high-distributing mature businesses, the dividends are not a footnote to the result, they are most of it.
Related
Stock market is the wider structure an index sits inside and summarizes. Index funds is how this becomes something ownable and what the fee costs. And dividend investing is the return shape this particular index produces.
I check what an index actually contains before I treat it as a proxy for anything. A British index is not a bet on Britain, which is roughly the opposite of what the name suggests, and the sector weights explain more about how it behaves than any macro view you can form.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.