Index Trackers Are So Widely Recommended..... But...?

jamesrichards808

Hi folks,


So I read a lot about investments and Index Trackers are widely recommended due to their low cost, and the fact that according to stats a large number (most?) Active Funds perform worse than Index Trackers.


I struggle with this fact, bearing in mind (for example) that the FTSE100 is currently only 2% higher than it was 19 years ago!


Am I really supposed to believe that the average Active (Managed) Fund has only made less than 2% over 19 years???


Would one really have been better off buying a tracker in 1999 than some funds?


Be grateful for your thoughts and comments!


Cheers!

capital0ne

Dividend Reinvestment!

msallen

The FTSE100 has a high dividend payout. Other indexes may have low dividends but high capital growth. You need to consider the total of growth and dividends. This is often calculated as if the dividends were reinvested in the same indexes. Consider the difference between ACCumulating and INCome tracker funds.

reeac

I was astonished to see that performance but seems to be correct. My best performing FTSE 100 share cost £10 in about 2000 and now stands at about £49 so there is good news there if you're lucky. There's lots of pressure, however, towards minimising risk by diversifying, rebalancing and buying into funds of funds, multimanager funds etc which both adds to fees and reduces capital gain.

capital0ne

As I said Dividend Reinvestment! The eight wonder of the world folks!

Aretnap

The FTSE100 is not the equities market. It is a tiny fraction of the equities market, which has performed badly over the last couple of decades compared to most other sectors. Very few funds invest solely in the FTSE100 and no expert would recommend that you invest all or even most of your money in aFTSE100 tracker.

That said, it is fairly meaningless to quote the headline figure for the FTSE100 given that most of the (admittedly lackluster) returns from FTSE100 companies come from dividends rather than share price growth. Look at the total return index as a more meaningful way of comparing the performance of various sectors.

steampowered

On 6 October 2000 the FTSE100 opened at 6382. Today it is 7155, an increase of 12%.

Also remember that the average dividend yield on the FTSE100 is 4.66%.

Over the past 10 years a FTSE100 tracker, with dividends reinvested, would have returned on average 8.8% per year - or 6.4% over the past 25 years, before fees (read https://www.ig.com/uk/trading-strategies/what-are-the-average-returns-of-the-ftse-100--190318#information-banner-dismiss).

In general I find the evidence in favour of tracker funds compelling.

jimjames

As above looking at the index level doesnt give the full picture.

One of my UK tracker funds unit price is as below with dividends reinvested

May 1999 £0.45
Oct 2019 £1.34

So it's almost tripled in value in 20 years so substantially more than 2% even though the index value is little changed

jamesrichards808

steampowered wrote: »

On 6 October 2000 the FTSE100 opened at 6382. Today it is 7155, an increase of 12%.

Ok I was actually thinking of the December 1999 "peak" of 6950, so ok actually nearer 20 years, and yes it was a peak, but from there its only about 2% over 20 years.



However your (and other's) points about dividends do make a lot of sense, and for the FTSE100 this certainly seems to be where the return comes from!

SonOf

I struggle with this fact, bearing in mind (for example) that the FTSE100 is currently only 2% higher than it was 19 years ago!

Others have correctly mentioned dividends. The other thing is where you invest. FTSE100 is UK large cap and has been one of the worst performing indexes for over two decades.

I would rather use a managed UK growth fund than invest in a FTSE100 tracker. Going into a cheap tracker in a naff area isnt a good idea.

Thrugelmir

SonOf wrote: »

I would rather use a managed UK growth fund than invest in a FTSE100 tracker. Going into a cheap tracker in a naff area isnt a good idea.

UK companies have been acquired by overseas investors at a considerable rate in the past decade. Seems as if some people value companies by their financial results and not by market indices.