If you are considering investing in UK stocks, knowing their stock market indices is critical. Especially when investing passively. In this post, we will analyze the 7 most important stock market indices in the United Kingdom, so that you can make an informed decision.
- FTSE 100
- FTSE 250
- FTSE 350
- FTSE Small Cap
- FTSE All Share
- MSCI United Kingdom
- MSCI UK All Cap
The United Kingdom’s stock market is the largest in Europe by market capitalization, ahead of France and Germany. It also has some unique characteristics that make it an interesting place to invest, not least the fact that it is only mildly correlated with other European stock markets.
In the first place we should highlight that the United Kingdom is no longer part of the European Union. Leaving aside the debate as to whether such decision will prove positive or negative in the long term, the truth is that its economy will be less intertwined with that of the European Union than before. And consequently, investing in the UK offers an additional degree of diversification.
Secondly, we must bear in mind that the United Kingdom has its own currency, the pound sterling (GBP). The pound is the fourth most liquid currency in the world, behind the US dollar (USD), the euro (EUR) and the Japanese yen (JPY). Adding sterling exposure to our portfolio is another way to boost diversification and lower systemic risk.
Another positive feature is that the London Stock Exchange is much more international than the rest of the European stock exchanges. What does that mean? It means that we will find companies from over the world listed on it, with the goal to attract capital from global investors.
For example, two of the main companies on the London Stock Exchange are Glencore and BHP Billiton, whose headquarters are in Switzerland and Australia, respectively. This makes UK stock indices much more international than indices in other countries.
Finally, and somehow related to the two companies just mentioned, several global commodity-producing companies are listed on the London Stock Exchange. Thanks to that, UK stock indices are set to benefit from a commodities bull market, so they can react well to a rise in inflation. Yet another reason to invest in UK stocks as a way to shield our capital from negative macroeconomic scenarios.
In the sections below we will discuss the most important British stock indices in detail. These indices are published and owned by the London Stock Exchange (FTSE) and MSCI, respectively.
The FTSE 100, also known as Footsie 100, is the most famous stock market index in the United Kingdom. It was launched in 1984 by the London Stock Exchange (LSE) and the Financial Times. In fact, FTSE stands for Financial Times Stock Exchange.
It is made up of 100 of the largest companies by market capitalization as well as the most liquidity on the London Stock Exchange. Stocks are weighted based on their market capitalization within the index. Hence larger companies represent a higher percentage.
Some of the most famous companies in the FTSE 100 are Unilever, Royal Dutch Shell, HSBC, Barclays, Glencore, Rio Tinto, Vodafone, British American Tobbaco, London Stock Exchange and GSK.
The index is currently owned by FTSE Russell, which is a subsidiary of the London Stock Exchange Group.
If you want to learn more about the Footsie 100, check out their official website.
Introduced in 1984, and also owned by FTSE Russell, the FTSE 250 index tracks the next 250 companies with the largest market capitalization on the London Stock Exchange.
This mean that if we rank companies listed on the London Stock Exchange, the FTSE 250 takes those between positions 101 and 350. The first 100 are those that make up the FTSE 100.
As a result, the FTSE 250 allows us to invest in smaller companies, many of them mid-caps and small-caps, i.e. companies with medium and small capitalizations.
Most of these companies are British and not international, which means that, unlike the FTSE 100, they allow us to bet much more on the future of the UK economy. But remember that this would be a riskier, less diversified, investment option.
If you want to find out more about the FTSE 250, here is the link to the FTSE Russell website.
The FTSE 350 is a stock market index that tracks the 350 listed companies in the United Kingdom with the largest market capitalization. In fact, the FTSE 350 is the combination of the FTSE 100 and the FTSE 250.
Investing in an ETF fund that tracks the FTSE 350 is the easiest way to simultaneously invest in the two indices we have discussed above.
Because FTSE 100 companies have a higher market capitalization, they dominated the FTSE 350, which means that the correlation between the FTSE 100 and the FTSE 350 is very high. In fact, approximately 85% of the FTSE 350’s market capitalization comes from the 100 largest companies in the index.
Here is the link to the official index website.
FTSE Small Cap
If we want to solely invest in British companies with small market capitalizations, we can opt for the FTSE Small Cap Index. None of these is among the 350 largest companies by market cap, so it is a true small and micro-cap index.
The number of stocks included in the FTSE Small Cap is not constant, as companies must reach certain thresholds, such as a minimum capitalization, to be included. However, the number of stocks fluctuates between 200 and 300.
Additional information can be found here.
FTSE All Share
Another option if we want to invest in British stocks in an even more diversified way, we can opt for the Footsie All Share index.
It includes all the companies that are part of the FTSE 350 and FTSE Small Cap indices. Because the number of shares included in the FTSE Small Cap varies over time, the total number of companies in the FTSE All Share also fluctuates but is usually between 550 and 650.
As in all FTSE indices, companies here are weighted based on their market capitalization, which means that the FTSE All Share has a very high correlation with the FTSE 100, as both indices are dominated by the same companies.
Also owned by FTSE Russell, you will find more information on its official website.
The following diagram details how the UK family of stock indices managed by the London Stock Exchange works:
In the next sections we will analyze two indices calculated by another provider: MSCI.
MSCI United Kingdom
The MSCI United Kingdom can be a very good alternative to the FTSE 100. Published by the US company MSCI, this index includes all British and UK-listed companies that are part of the MSCI World Index.
The number of shares within the index is not fixed, as it depends on the eligibility criteria set by MSCI, which depend mostly on their market capitalization. But it is usually very close to 100, hence it has a very high correlation with the FTSE 100 index.
Thus, this index is also heavily influenced by international, non-British corporations listed on the London Stock Exchange. An example would be Australia’s Rio Tinto. Consequently, the weight of the commodity producing sector is considerably large.
Something to keep in mind is that, unlike FTSE-managed indices, MSCI indices weight companies based on their free float-adjusted market capitalization. As a result, those companies that have a very significant number of shares in the hands of investors considered insiders, such as founders or governments, will have a lower weight in the index.
For all practical purposes, however, the differences between the MSCI United Kingdom and FTSE 100 indices are minimal, so it will probably be very easy for us to find an ETF that replicates either of them.
You can find more information about the MSCI United Kingdom index on the MSCI’s website.
MSCI UK All Cap
The last stock market index we will discuss is the MSCI UK All Cap Index. It includes all UK-listed companies that are part of the MSCI All Cap Index, a global index made up of large, medium and small companies.
The exact number of stocks within the index varies constantly, depending on the number of companies that meet the criteria to be included, but it fluctuates around 800.
As you can imagine, the MSCI UK All Cap index is very similar to the FTSE All Share. Both of them aim to follow all companies listed on the London Stock Exchange, as long as they have some decent liquidity levels
You will find more details in this link.
I hope you found this post about the UK’s most important stock market indices useful. A proper understanding of how these indices work will allow you to choose the best ETF, in order to invest in British and other UK-listed stocks in the most effective way.
If you fancy reading about stock market indices in other countries, check out the following section of my website:
Funds and ETF
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