The FTSE 100 Explained: What It Is and How to Invest in It

Britain's Premier Stock Market Index

The FTSE 100 — formally the Financial Times Stock Exchange 100 Index — is the most widely quoted measure of the UK stock market. Created in 1984 with a base value of 1,000 points, it tracks the 100 largest companies listed on the London Stock Exchange by market capitalisation. Every day, news bulletins report whether the FTSE 100 has risen or fallen, making it the barometer that most Britons associate with the stock market.

What Companies Are in the FTSE 100?

The index includes some of the world's most recognisable corporate names. Major constituents include Shell, HSBC, AstraZeneca, Unilever, Rio Tinto, BP, GlaxoSmithKline, Barclays, and Diageo. These are predominantly large, multinational businesses. In fact, many FTSE 100 companies earn the majority of their revenues overseas, meaning the index has significant exposure to global economic trends rather than just the UK domestic economy. The composition is reviewed quarterly by FTSE Russell.

How Is the FTSE 100 Calculated?

The FTSE 100 is a market-capitalisation weighted index. Larger companies have a greater influence on the index's movements than smaller ones. This construction means the FTSE 100 is heavily concentrated in a handful of sectors: financials, energy, mining, consumer staples, and healthcare together account for a large proportion of the total index weighting.

FTSE 100 vs FTSE 250 vs FTSE All-Share

The FTSE 250 covers the next 250 largest UK-listed companies and is more domestically focused. The FTSE All-Share combines the FTSE 100, FTSE 250, and FTSE SmallCap, covering around 600 companies and representing approximately 98 per cent of UK market capitalisation. The FTSE All-World is a global index covering around 4,000 companies in 50 countries.

The FTSE 100's Historical Performance

The FTSE 100 has historically delivered lower total returns than the US S&P 500 in capital terms. However, it has traditionally offered a higher dividend yield — often 3 to 4.5 per cent — partly compensating for lower price growth. One reason for the relative underperformance is its heavy weighting towards old economy sectors like energy, mining, and financials, combined with limited exposure to fast-growing technology companies that dominate US indices.

Should UK Investors Focus on the FTSE 100?

Many UK investors have a natural bias towards the FTSE 100. However, putting all your investment eggs in one geographical basket is rarely optimal. Most financial experts recommend UK investors hold a globally diversified portfolio, of which UK stocks might form 10 to 25 per cent of the equity allocation. The FTSE 100 can be part of a diversified strategy but should not be the whole story.

How to Invest in the FTSE 100

The iShares Core FTSE 100 ETF (ISF) and the Vanguard FTSE 100 ETF (VUKE) both track the index at very low cost — around 0.07 to 0.09 per cent OCF. These can be held in a Stocks and Shares ISA on most platforms. The Vanguard FTSE UK Equity Index Fund and HSBC FTSE 100 Index Fund offer similar exposure as traditional unit trusts. Any major UK investment platform will allow you to invest in these funds, including Vanguard UK, Hargreaves Lansdown, AJ Bell, InvestEngine, Trading 212, and Freetrade.

A Note on Dividends

The FTSE 100 has historically been one of the more generous dividend-paying indices in the world. Many of its largest constituents — Shell, Rio Tinto, Unilever, HSBC — pay substantial dividends. FTSE 100 ETFs pass these dividends on to investors either as cash distributions or as reinvested units, depending on whether you hold an income or accumulation share class. For most long-term investors, choosing the accumulation class accelerates compound growth and is more tax-efficient within an ISA.