In UK equity markets, the FTSE 100 and the FTSE All Share indices stand out for investors. Both serve as barometers of market sentiment and performance, yet they cater to different segments of the market, offering unique insights and opportunities. This article explores the fundamental differences between the FTSE 100 and the FTSE All Share indices and discusses the implications of these differences for investors.
THE FTSE 100: AN OVERVIEW
The FTSE 100 or the Financial Times Stock Exchange 100 index, comprises the 100 largest UK companies by market capitalisation listed on the London Stock Exchange (LSE). Often referred to as the ‘UK's blue-chip index’, it represents approximately 80% of the market capitalisation of the LSE. The FTSE 100 is heavily weighted towards international giants in sectors such as pharmaceuticals, oil & gas and banking, which derive a significant portion of their revenues from outside the UK. This global exposure makes the FTSE 100 less of a pure play on the UK economy and more a reflection of global economic and market trends.
THE FTSE ALL SHARE: A BROADER PERSPECTIVE
The FTSE All Share index is more encompassing, including around 600 of the LSE's listed companies. It covers not only the constituents of the FTSE 100 but also those of the FTSE 250 (the next 250 largest companies after the FTSE 100) and the FTSE Small Cap index. This broad coverage makes the FTSE All Share a more comprehensive reflection of the UK stock market, representing about 98% of the UK's market capitalisation. It includes a diverse range of industries and is considered a more accurate gauge of the UK economy's health.
KEY DIFFERENCES AND THEIR IMPLICATIONS FOR INVESTORS
Market representation: The most significant difference between the FTSE 100 and the FTSE All Share is the scope of market representation. The FTSE 100 focuses on the largest companies, many of which are multinational corporations with diversified global incomes. In contrast, the FTSE All Share offers a broader view of the UK market, including small-cap and mid-cap companies more sensitive to domestic economic changes.
Sector diversification: The broader nature of the FTSE All Share allows for greater sector diversification. While the FTSE 100 is dominated by a few large sectors, the inclusion of smaller companies in the FTSE All Share means it encompasses a wider variety of sectors. This diversification can provide more balanced exposure across the UK economy, potentially reducing sector-specific risks.
Volatility and performance: The FTSE 100's concentration in large, international companies can lead to lower volatility compared to the more domestically focused companies found in the FTSE All Share. However, this isn't a hard rule, as global economic shocks can impact the large multinationals in the FTSE 100. Historically, the performance of the two indices can diverge significantly over short periods, though they often align more closely over the long term.
IMPLICATIONS FOR INVESTORS
The choice between investing in funds or assets benchmarked against the FTSE 100 versus the FTSE All Share depends on an investor's risk tolerance, investment horizon and goals. The FTSE 100 may appeal to those seeking exposure to global giants and a potential hedge against UK-specific economic downturns, given its multinational composition. Its constituents often pay significant dividends, making it attractive for income-focused investors.
On the other hand, the FTSE All Share may appeal to investors looking for a broader, more comprehensive investment in the UK stock market. Its wider coverage across different sectors and company sizes could offer growth opportunities, particularly in rising markets where smaller companies can outperform. Additionally, investing in the FTSE All Share allows for greater exposure to the UK economy, which could be beneficial in times of domestic economic strength.
Understanding the differences between the FTSE 100 and the FTSE All Share is crucial for those investing in the UK equity market. While the FTSE 100 offers exposure to the UK's largest and often most stable companies, the FTSE All Share provides a more comprehensive view of the UK market, including smaller, potentially faster-growing companies. Each index caters to different investment strategies and objectives. By carefully considering their distinct characteristics, investors can make informed decisions that align with their investment goals, whether they seek stable income, growth opportunities or a combination of both in the UK market.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.