The FTSE 100 index has enjoyed a real renaissance over the last three years. Many Footsie stocks derided as ‘dinosaurs’ not that long ago have come roaring back into fashion.
To give a flavour, consider the exceptional three-year performance of this basket of 10 blue chips:
- Anglo American: +77.2%
- Barclays: +182.5%
- British American Tobacco: +83.2%
- BT: +53.9%
- International Consolidated Airline: +148.2%
- Lloyds: +112%
- Marks & Spencer: +91.2%
- NatWest: +118.3%
- Tesco: +63.5%
- Vodafone: +29.1%
Note, these returns don’t even include dividends! The Footsie’s three-year total return is a very healthy 47.35%.
Clearly then, the blue-chip index has been a lucrative place to buy stocks recently (albeit not every share has done well).
But what about over a 10-year period? How much would someone have today if they had invested five grand in the UK’s blue-chip index a decade ago?
Would our investor have doubled their money?
According to investing platform AJ Bell, the FTSE 100’s 10-year annualised total return (which includes reinvested dividends) is 9.39%. That means £5,000 would have turned into approximately £12,265 (excluding platform fees).
Therefore, this investor would have comfortably doubled their money. In contrast, holding money in a Cash ISA over this period would have lost money in real terms due to inflation.
This demonstrates the wealth-creating power of the stock market.
Could have been higher
As good as this result is, it’s worth noting that this is just the index’s return. You can invest in this through an index tracker like the Vanguard FTSE 100 ETF (LSE:VUKG).
However, had someone invested their five grand in five individual FTSE 100 stocks, they could have done a lot better. Because many well-known shares have crushed the market average over this time period, as we saw with the three-year returns above.
There are a few reasons why the FTSE 100 has soared in the past couple of years. These include:
- Rotation into cheaper value stocks
- A commodities supercycle benefitting mining and energy stocks
- Attractive high dividend yields
- Some institutional investors diversifying away from US equities
- Old-economy UK firms being immune to AI disruption (ie, heavy assets, low obsolescence)
- Falling interest rates
- Massive share buybacks
What about the next 10 years?
Looking ahead, I’m quite bullish on the FTSE 100. A lot of the largest constituents look set to benefit from AI rather than be disrupted by it.
For example, pharma giants like AstraZeneca and GSK can use the technology for drug discovery, increasing the chances that drug candidates will be successful in clinical trials. They should also use AI to cut costs and boost margins, as could supermarkets, miners, and banks.
Of course, if any of those trends above reversed (higher interest rates, for example), then the ETF would likely underperform. So there’s no guarantee the index will produce near-10% returns over the next decade.
However, the Vanguard ETF above is an accumulating one, meaning it reinvests dividends along the way. And the index’s starting yield today is decent, at 3.05%, while the valuation is still cheap.
Therefore, I think a FTSE 100 tracker is worth considering buying for the next 10 years.
