The FTSE – what is it and why is it important to investors?

Most people, let alone investors, will be familiar with seeing the four-letter acronym ‘FTSE’. But what does it actually stand for? There’s normally no real explanation given for what it is or where it comes from.

With more people taking a hands-on approach to investing, we take a closer look at the FTSE – what is it, why is it relevant, and what does it mean for investors?

What is the FTSE?

The Financial Times Stock Exchange (FTSE) Russell Group is an organisation owned by the London Stock Exchange (LSE). It specialises in managing stock exchanges and creating indices. An index is usually made up of a range of company shares, or ‘stocks’, and represents the performance of a particular market. It reflects the ups and downs of each company’s share price.

In the UK, the FTSE 100 is probably the most well-known index. It measures the performance of the 100 largest companies traded on the LSE. There are a variety of other indices though.

There’s also the FTSE 250, which makes up the 250 next biggest companies. These companies often carry out more of their business in the UK compared with those on the FTSE 100, which often earn more of their revenue overseas.

The FTSE All-Share integrates the FTSE 100, FTSE 250 and FTSE SmallCap. This means it also includes much smaller companies – the 351st to 619th largest companies on the LSE.

FTSE 100, 250 and All-Share – what’s the difference?

Why does it matter to investors?

Measuring the performance of a set of companies is just one use for an index. For investors they’re also important when picking a fund.

Funds pool together the money from lots of investors, which is then invested by a professional fund manager in a wide range of shares and/or bonds. The fund might use a FTSE index as a benchmark. This means the manager selects most of the investments from this index, against which investors can compare how they’ve performed.

There are two types of strategy for investors to think about when investing in funds – active or passive.

An active fund manager typically chooses and invests in a selection of companies from a particular index. The aim is to perform better than the fund’s benchmark over the long term and use it to compare performance. The costs of investing in active funds are greater, but the hope is these are offset by superior performance. Of course, that won’t always be the case and some fund managers don’t perform as well as the benchmark.

The alternative – a passive fund which will buy shares in each of the companies from an index in order to replicate its performance as closely as possible. The fund’s manager will try to do this by using replication techniques like reinvesting dividends and keeping trading to a minimum, as this keeps costs low. These funds normally have lower charges which helps track the index closely. But they tend to fall behind slightly over the long term because of the costs involved.

Let’s look at an example using the FTSE All Share

The FTSE All-Share index is a good measure for the health of the UK economy. Below, is an example of both active and passive fund managers from our Wealth Shortlist using the index as a benchmark.

Annual percentage growth

Past performance is not a guide to future returns. Source: Lipper IM 28/02/21. N/A = full year performance not available.

Despite both funds choosing the FTSE All Share benchmark, the active strategy, AXA WF Framlington UK has outperformed over the last four years, while the Legal & General UK Index fund has simply tracked it closely.

This particular example shows the expertise of the active manager over a four-year timeframe. But the key takeaway is that a fund’s performance is related to their respective benchmark. If they had chosen a different benchmark, this table could be boasting some very different numbers.

Remember, past performance isn’t a guide to future returns. While the active fund manager managed to outperform the benchmark in this case, it doesn’t mean it’ll happen again. Investments can rise as well as fall in value, so you could get back less than you invest.

What does this all mean for investors?

FTSE is a renowned UK organisation for providing indices, though there are several others across the world.

The FTSE also have indices for other markets beyond the UK. Investors could use a FTSE index to measure the performance of a certain sector or region like Europe, Asia or Smaller Companies.

Understanding what any index measures and how this compares to the performance of investments is important for all investors.

Interested in investing in funds but stuck for ideas? Have a look at our Wealth Shortlist.

The Wealth Shortlist is designed for investors comfortable with building and maintaining their own portfolio. It’s there to help investors build well-balanced and diversified portfolios.

This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice.

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