The Best FTSE 100 ETF to Watch
The FTSE 100 is a stock market index comprising the largest 100 companies listed on the London Stock Exchange (LSE) by market capitalisation. For those wanting to gain exposure to the index, Exchange-Traded Funds (ETFs) can be an effective and efficient way of doing so. But, with multiple options available, how can you know which one to pick?
In this article, we will explain how FTSE 100 ETFs work, examine what to look for in the best FTSE 100 ETF and highlight several options for investors to watch in 2024.
Table of Contents
How Do FTSE 100 ETFs Work?
Like other stock indices, it is not possible to invest in the FTSE 100 directly. However, there are instruments, such as ETFs, which are designed specifically to mirror the performance of the FTSE 100. But how do they work?
A FTSE 100 index ETF attempts to track the underlying index by using investor money to purchase shares in all the companies which make up the index. The ETF provider will then manage the portfolio on behalf of investors to account for the quarterly rebalancing of the index.
Consequently, FTSE 100 ETFs are able to mirror their underlying index fairly accurately and, whichever ETF you pick, you can expect it to provide a performance which is more or less identical to the FTSE 100. So, if they all work in the same way, how can you pick the best FTSE 100 ETF?
How to Pick the Best FTSE 100 ETF
Although they may seem exactly the same on the surface, there are some differences between each FTSE 100 tracker ETF. However, here it is important to note that what exactly constituents the best FTSE 100 ETF will depend on you and your investment goals.
Nevertheless, there are a number of factors which are important to consider when deciding which is best for you. In the following sections, we will take a look at a few of these considerations, although bear in mind that this list is by no means exhaustive.
Costs and Fees
Generally speaking, ETFs charge low fees. ETFs which passively track an underlying stock index, such as the FTSE 100, charge even lower fees as less work is required to manage the fund.
However, the ongoing annual cost of an ETF can vary from provider to provider. For example, the Vanguard FTSE 100 UCITS ETF charges an annual fee of 0.09%, whereas the HSBC FTSE 100 UCITS ETF charges an annual fee of 0.07%.
Make no mistake, both of these fees are incredibly low, which is one of the key selling points of investing in ETFs. Nevertheless, presuming you make regular investments into the ETF, over time, these seemingly miniscule differences in fees can add up.
Liquidity
Amongst other things, an ETF’s liquidity can be judged by both the trading volume of its own shares and the trading volume of individual assets held in its portfolio. Given that, by definition, each FTSE 100 ETF should hold exactly the same assets, it is the former of these which you may want to consider when choosing your FTSE 100 tracker ETF.
Whether trading or investing, higher liquidity is typically always preferable but it is generally more of a concern for those with shorter time horizons than it is for those looking to buy and hold for the long-term.
Simply put, the higher an asset’s liquidity, the easier it is to buy or sell, ensuring investors can quickly and easily convert their holdings into cash. Assets with higher liquidity also benefit from lower bid-ask spreads, which is the difference in price between an asset’s buy and sell prices.
Continuing with our example ETFs from the previous section, at the time of writing, based on average trading volume, the Vanguard FTSE 100 UCITS ETF is far more liquid than the HSBC FTSE 100 UCITS ETF.
Distributing or Accumulating?
The FTSE 100 has a reputation for being home to many reliable dividend paying stocks and, consequently, investing in the FTSE 100 can be a popular choice for income investors who seek to generate a regular income from their investments.
However, not all FTSE 100 ETFs distribute dividend payments amongst shareholders. ETFs are either classed as distributing or accumulating. A distributing ETF will distribute all dividends received from its holdings amongst shareholders, whereas an accumulating ETF will reinvest dividend payments back into the fund on behalf of its shareholders.
Which choice is better is entirely down to personal preference. Reinvesting dividends can be very rewarding over the long-term, as it allows investors to benefit from the power of compounding returns, and allowing the ETF manager to do this automatically on your behalf is far more efficient than reinvesting the dividends yourself.
However, many investors prefer generating receiving income from their investments as cash which they can then choose to either spend on something else, save or reinvest. There is no right or wrong answer here, it really depends on what you are looking to get out of your investment.
Tracking Accuracy
Our final consideration in choosing the best FTSE 100 index ETF is its tracking accuracy. Naturally, if you are looking to gain exposure to the FTSE 100, it is preferable to choose an ETF which tracks the index as closely as possible.
Fortunately, ETFs are very transparent, and provide a wealth of information regarding their portfolio, its performance and how it has tracked its underlying index over time. You will usually be able to find how closely a FTSE 100 ETF has tracked the index in its factsheet or annual report.
FTSE 100 ETF Comparison
At Admirals, we offer our clients the ability to invest in a number of FTSE 100 ETFs, including the following, which we will take a closer look at below:
- iShares FTSE 100 UCITS Acc ETF (CSUKX)
- HSBC FTSE 100 UCITS ETF (HUKX)
- Lyxor FTSE 100 UCITS ETF (L100)
- Vanguard FTSE 100 UCITS ETF (VUKE)
Invest in FTSE 100 ETFs with Admirals
With an Invest.MT5 account from Admirals, you can invest in various FTSE 100 ETFs as well as over 200 other ETFs and more than 4,500 stocks! In order to get started, click the banner below and open an account today:
External Sources
- iShares – Data as of 31 July 2023 unless specified.
- HSBC – Data as of 30 June 2023 unless specified.
- Amundi ETF – Data as of 31 July 2023 unless specified.
- Vanguard – Data as of 31 July 2023 unless specified.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
