Capital comment: Tracker funds aren’t the only way to trade the FTSE 100
HAVE you reached that point in life where your outgoings are still more than incomings, and you need to grow up a little? Join the club. With company pensions affording you little more than a year’s subscription to your local golf club upon retirement, it is obviously important to put money away for the future.
So what should you invest in and how should you do it? Currently, investing in equities is like having to turn up to work every day – there is no other option. Interest rates are as low as they have ever been, which largely rules out government bonds or cash unless you want the value of your money to decrease over time (including the effects of inflation). Commodities are dangerous, and foreign exchange trading is by and large only for the short term. But while markets are subject to a lot of short-term volatility, in the long run 5 per cent is a fairly good benchmark with which to measure UK equity returns over the last 25 years.
Let’s say you have £10,000 to invest. You have three realistic options; first, donate your money to a “professional” fund manager and pay an annual fee; secondly, pick your own stocks and join the 80 per cent of other fund managers who fail to beat the index (thus also rendering option one redundant); or thirdly, swallow your pride and take out a tracker fund. These simply track the movements of a major index like the FTSE 100 or Dow Jones, and tend to be quite cheap. You can also track indices through an exchange-traded fund (ETF), which can be bought and sold through brokers like other listed stock. I spoke to a well-known share dealing company and, after a £12 online dealing charge to buy such an ETF, the yearly fee is 0.35 per cent. So let’s call it a cheap £50 charge in the first year. With an potential 5 per cent year-on-year return, 25 years from now your £10,000 should be worth just over £30,000.
However, I wish to share another relatively unknown alternative. Everyone has the impression that financial spread-betting is only used by day traders. This is largely true but, if you look a bit closer, spread-betters also offer some options for the long term. And one of those is futures trading. We offer this service at Capital Spreads, but don’t see this as a sales pitch. There is no great spread revenue for us to earn out of futures trading.
I am not going to bore you with the workings of spread-betting, but if you trade £1.5 per point on the FTSE December now, and roll it over to the June contract when it expires in December, you could get the same exposure as a FTSE tracker, for around £10 per year. You wouldn’t even need to use the whole £10,000. If you used £2,000 to place this trade, the rest could be in the bank earning interest.
And forget stamp duty and annual charges. You don’t have to pay tax on any profits, as spread-betting is still considered gambling. I would highly advise remembering this, however. Spread-betting carries a high level of risk to your capital, and you can lose more than your initial deposit.
Will Nicholls is a dealer at Capital Spreads.
While Capital Spreads attempts to ensure that the information herein is accurate at the date the information was produced, however, Capital Spreads does not guarantee the accuracy, timeliness, completeness, performance or fitness for a particular purpose of any of the information provided herein and under no circumstances are they to be considered an offer, solicitation to invest or be construed as giving investment advice.