FTSE trackers: Passive investment proving to be “miner’s” field.

11th March 2011

They raised their concerns on adviser trade website Money Marketing this week.

Mott warns that while some investors believe they are getting exposure to the UK economy, because of the international nature of the index, they will be concentrated in certain sectors particularly in natural resources, mining and oil.

He suggests that resources may now be playing a similar role to TMT (technology, media and telecoms) stocks in the late 1990s, which made up a significant proportion of the FTSE then, and led to investors losing money when the index fell as the technology bubble burst.

However some managers say you always need to consider what you are getting when you buy a tracker i.e. cheap access to a benchmark.

Talking to Money Marketing, HSBC Global Asset Management head of UK external distribution Phil Reid said: "We think index funds do what they say on the tin by offering cheap access to the benchmark without slicing and dicing the market."

Perhaps that holds the key. When you are following a benchmark you need to be aware of what the benchmark is comprised of. That applies to the FTSE 100 as with any other index. The FTSE is hugely exposed internationally with many companies listed here for the purposes of raising capital, rather than because much of their business is based in the UK.

So when buying the FTSE 100 you are not buying the UK economy, but shouldn't investors be aware of that already? A better, though still far from a perfect means of getting exposure to the UK is the FTSE 250, which follows stocks 101 to stock 350 by market cap and has traditionally reflected the domestic economy better.

Looked at another way, the FTSE100's international exposure is also held out as a strength. For example for a long time, some investment advisers were content for investors to get exposure to emerging markets by buying Western firms that themselves invested in those markets.

Obviously, on a much shorter timescale and providing you know what you are buying, today's Telegraph market report, quotes an analyst who suggests buying the dips.

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