What are the average returns of the FTSE 100?

What is the FTSE 100?

The FTSE 100 — or the ‘Financial Times Stock Exchange 100 Index’ — is a market index composed of the 100 largest companies listed on the London Stock Exchange as measured by their market capitalisation. It was created on 3 January 1984, with a starting value of 1000 and now has a valuation of circa 8,300 points.

To qualify for inclusion on the FTSE 100, all companies must have a full listing on the London Stock Exchange, be denominated in sterling and meet minimum criteria for both market capitalisation and liquidity. Companies with a higher market capitalisation will carry greater weight in the index, and changes in their share prices will influence the movement in the index more.

The index is composed of UK blue chip shares across multiple sectors including energy, mining, finance, pharmaceuticals, and telecoms, and are reviewed each quarter by FTSE Russell. They can be demoted or promoted dependent on the movement of the largest FTSE 250 shares.

The FTSE 100 is widely regarded as a benchmark for the UK economy, though in reality is perhaps more linked to the global economy. For example, FTSE Russell data indicates that roughly three-quarters of FTSE 100 company income is derived from overseas — and the index is dominated by a handful of sectors, including banks, oilers and miners.

What are the average returns of the FTSE 100?

There are two ways to calculate the average returns of the FTSE 100. First is the price return, which simply measures the share price movement of the constituents within the index. Second is the total shareholder return, which also includes dividends paid out, and their compounding effect when reinvested.

The total shareholder return is arguably the superior metric, as it counts all returns from investing in the FTSE 100. In the 20 years from 2003 to 2023, FTSE 100 total shareholder returns came in at 241%, generating an average return of 6.3% on an annualised basis, including dividends.

For context, the current dividend yield on the FTSE 100 — in other words, the average annual dividend payout — is about 3.5%, which means that roughly half of the total return is composed of dividends.

However, you have to be careful with your assumptions. For context, the FTSE 100 hit a then-high of 6,930 at the end of 1999, and in the 20 years to the end of 2019, stood at 7,542, barely rising by 600 points. If you include dividends, this was a return of just 122% over 20 years, or 4% per year.

If you don’t, then a £1,000 investment at the end of 1999 would have been worth just £1,088 at the end of 2019 — and that doesn’t include inflation or investing fees. If you did reinvest the dividends, you would have a balance of £2,222.

The key point to understand is that even when taking two 20-year periods with significant years of overlap, you get very different results, especially when factoring in dividends.

Interestingly, all of the best-performing years of the FTSE 100 directly followed a period of downward volatility. The index crashed by 20% in the 2002 dot-com bubble and rose by 16% in 2003, fell by 25% in the 2008 Global Financial Crisis and rose by 25% in 2009, and fell by 9.5% in the pandemic crash of 2020 and then rose by 17% in 2021.

Of course, when you consider isolated peak-to-trough declines, the numbers get even sharper. For context, Black Monday saw the FTSE 100 fall by 21.7% over just two days; while Q1 2020 saw the index fall by 25% in just three months due to the pandemic crash.

FTSE 100 vs S&P 500 returns

The S&P 500 — which tracks the 500 largest companies in the US by market capitalisation — is a direct comparator for the UK’s FTSE 100. Like the FTSE, the US index is considered to be a benchmark for the country’s economic performance and has returned an average of 10.26% per year since its modern inception in 1957 through to the end of 2023.

Just like the FTSE 100, this return has not been without volatility. For context, the S&P 500 fell by almost 57% between October 2007 and March 2009 during the Global Financial Crisis, and by over 15% during the initial stages of the pandemic. Despite a recovery to record highs, the index then fell by more than 1,500 points during 2022 before rebounding in the second half of 2023.

Perhaps a core concept to understand is that while the overall return generated by the FTSE has historically been lower than the S&P 500, its dividend stocks are also less susceptible to global shocks than the tech titans that dominate its US counterpart. For context, 2021 saw the US index boom on the back of ultraloose monetary policy but when the S&P 500 fell into a bear market in 2022, the FTSE 100 actually rose slightly in the same year.

This makes sense when you consider that many of the largest US companies in the tech sector spend their revenue on growth, while most FTSE shares engage in dividends and share buybacks as they are fully established and not seeking to grow further.

Commonly, many investors will look to invest in both indices — with the capital gains offered by the US index delivering outsized returns in the good times, while FTSE 100 offers some protection during recessionary periods.

FTSE 100 returns when factoring in inflation

Of course, when considering the average return of the FTSE 100, you also need to consider the impact of inflation to get your ‘real’ return. The real return is your yield when you subtract the impact of inflation from the total shareholder return.

As the inflation rate is generally positive, nominal returns will usually be greater than real returns — and inflation in general is a significant part of why investing makes sense — because it usually affords a better chance at maintaining purchasing power compared to the lower returns offered by savings accounts.

If you consider the annualised 6.3% return over the past 20 years, and then subtract the average inflation rate of 2.8% over the same time frame, then you get an average real annualised return of 3.5%. However, it’s important to remember that past performance is no indicator of future returns, and there’s always a risk you could lose more than you put in when investing.

What impacts FTSE 100 returns?

Most of the firms which constitute the FTSE 100 index have an international presence. This means that there’s a wide range of factors that can influence performance. Some of the key factors include:

• Global economic performance — FTSE 100 movements are often a result of wider market movements rather than UK economic strength. Global economic factors, geopolitical instability, and the individual performance of a handful of larger companies at the top can influence the index significantly. This is contrary to the idea that the index represents the UK economy; the FTSE 250 is perhaps a better barometer, as it’s more domestically focused
• Currency fluctuations — FTSE Russell data indicates that roughly three-quarters of FTSE 100 company income is derived from overseas with a large proportion of this cash generated in US dollars. For example, Shell gets only 5% of its revenue from North Sea oil and gas. If FTSE 100 companies generate most of their revenue in US dollars, and then convert this revenue into sterling, a weaker pound means that the index does better as the same of amount of US dollar earnings translates into more pounds
• Monetary policy — elevated interest rates can have a negative impact on the price of the FTSE 100. When interest rates rise, it increases borrowing costs for firms, which can squeeze profit margins. This effect has been particularly acute over the past couple of years given the long period of extremely low rates beforehand. However, higher interest rates can boost the profits of FTSE 100 banks such as Lloyds
• Quarterly earnings — larger publicly traded companies are typically obligated to report their financial results every quarter. In most cases, when a company’s earnings exceed analyst expectations, we see an appreciation in its share price
• Oil and commodity prices — some of the largest constituents of the FTSE 100 are oil and mining companies. A rise in the price of oil and other commodities will likely lead to a rise in the share price of oilers and other commodity producers, such as Shell, BP, Rio Tinto and Glencore
• UK sentiment — bullish or bearish general sentiment can influence the returns of the FTSE 100. For example, the Brexit vote may have had a negative impact on sentiment in the UK. More recently, the budget tax rises could have also soured appetite for investment

How to trade in the FTSE 100

1. Create or log in to your trading account and go to our trading platform
2. Decide whether you want to trade CFDs
3. Search for FTSE 100 and select a corresponding ETF
4. Choose your position size
5. Monitor your trade

The iShares Core FTSE 100 UCITS ETF (CUKX) is a popular choice for investors, though there are many similar ETFs tracking the index. You can usually choose whether to reinvest dividends or have them paid as income.

You may wish to learn more about the differences between investing and trading. Investing in shares directly is typically lower risk, while trading on leverage offers higher rewards in exchange for increased risk.

This means you could gain – or lose – money much faster than you might expect, including losing your initial deposit. You should assess your risk appetite carefully before engaging in leveraged trading. Past performance is not an indicator of future returns.

New to trading? Try out our demo account.