Investing in the FTSE 100: What the UK's Blue-Chip Index Offers International Investors

The FTSE 100 is the UK's most widely recognised stock market index, comprising the 100 largest companies listed on the London Stock Exchange by market capitalisation. It is one of the world's most established equity benchmarks and for decades served as the default equity investment for UK private investors.

Yet the FTSE 100 is less well understood than its prominence suggests. Its sector composition, its heavy weighting towards international revenues, its valuation discount relative to US equities, and its dividend characteristics make it quite different from what many investors assume — and understanding these features is essential for making an informed decision about its role in an internationally diversified portfolio.

This guide is for general information purposes only. Equity investments can fall as well as rise. Past performance is not a reliable indicator of future results. Seek independent professional advice.

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What Is the FTSE 100?

The FTSE 100 (pronounced "footsie") was launched in 1984 with a base level of 1,000. It is calculated and maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group. Membership is determined by market capitalisation, with the index reviewed quarterly. Companies dropping below approximately 110th rank by market cap are relegated; those rising above 90th are promoted.

As of 2026, the FTSE 100 index level has exceeded 8,000 for extended periods, though it took considerably longer to reach that level than equivalent US indices reached corresponding milestones — a point often used in valuation comparisons.

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Composition: What Does the FTSE 100 Actually Contain?

Sector Weights

The FTSE 100 is heavily concentrated in a small number of sectors that differ markedly from US-dominated global indices:

• Financials (~20%): Major UK banks (HSBC, Barclays, Lloyds, NatWest), insurance companies (Legal & General, Aviva, Prudential), and London Stock Exchange Group itself.
• Energy (~12%): Shell and BP dominate; both are among the top 5 largest companies in the index.
• Materials/Mining (~10%): Rio Tinto, BHP (dual-listed), Anglo American, Glencore, Antofagasta — global mining majors with primary or significant London listings.
• Consumer Staples (~18%): Unilever, Diageo, British American Tobacco, Imperial Brands, Reckitt Benckiser — some of the world's most established global consumer brands.
• Healthcare (~12%): AstraZeneca, GSK (GlaxoSmithKline), Haleon — AstraZeneca in particular has grown to become one of the largest companies in the index following its pharmaceutical pipeline success.
• Industrials, Telecoms, Utilities, Real Estate: Remaining weight distributed across these sectors.

What the FTSE 100 lacks: Relative to the S&P 500, it has minimal exposure to software, semiconductors, internet platforms, and pure-play technology. Microsoft, Apple, Nvidia, Meta, and Alphabet — the companies that drove US market outperformance in 2013–2024 — have no equivalent in the FTSE 100. The UK's technology sector is primarily represented through the AIM market (smaller companies) and through ARM Holdings, which relisted in the US rather than in London.

The International Revenue Reality

A widely misunderstood feature of the FTSE 100: it is not a "UK economy" index. Over 70% of FTSE 100 revenues are generated outside the UK. Shell, HSBC, Unilever, Rio Tinto, AstraZeneca, BP, British American Tobacco, and Diageo are all global businesses that happen to be listed in London. Their earnings are primarily in US dollars, euros, and other international currencies.

This has two implications. First, the FTSE 100's performance is partly driven by sterling weakness (companies reporting in dollars see higher sterling profits when the pound falls), not just by UK economic conditions. Second, the FTSE 100 should not be regarded as a direct play on the UK economy — that is better approximated by the FTSE 250 (mid-cap index) or FTSE All-Share.

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Valuation: The "FTSE 100 Discount"

The FTSE 100 has traded at a persistent valuation discount to the S&P 500 for most of the past decade:

• S&P 500 P/E ratio: typically 20–25x trailing earnings (higher during growth rallies)
• FTSE 100 P/E ratio: typically 11–14x trailing earnings

This discount is often attributed to:

• Sector composition: Energy, mining, and financial companies command lower valuations than growth technology businesses
• Lower growth expectations: FTSE 100 earnings grow more slowly (in consensus estimates) than US technology-heavy indices
• UK political and regulatory risk premium: Brexit uncertainty and post-Brexit economic adjustment added a risk premium to UK equities from 2016 onwards
• Sterling weakness: The FTSE 100's international earnings look cheaper in sterling when sterling is weak (boosting prices) but the index itself has underperformed in US dollar terms

Whether the discount represents undervaluation (a buying opportunity) or appropriate pricing (justified by lower growth) is a matter of ongoing debate among fund managers and analysts. Some contrarian investors argue that European and UK markets are structurally undervalued relative to the US and offer better long-run starting valuations for patient capital.

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Dividends: The FTSE 100's Defining Characteristic

The FTSE 100 has historically offered one of the highest dividend yields of any major developed market index — typically 3.5–4.5% gross yield, compared with 1.5–2% for the S&P 500.

This reflects the sector composition: oil majors, miners, banks, tobacco companies, and utilities are all high-dividend-paying businesses. For income-focused investors, the FTSE 100 is an attractive source of equity income.

However, the dividend yield and dividend sustainability are distinct considerations:

• Dividend cover: The ratio of earnings to dividend matters. FTSE 100 dividends were cut significantly in 2020 (particularly from banks under regulatory guidance, and oil majors facing oil price collapse). A high headline yield can be misleading if cover is thin.
• Resource company cyclicality: Mining and energy dividends are directly linked to commodity prices. In a commodity downturn, dividends are often cut; in a boom, they are supplemented with special dividends.
• Tobacco stocks: BAT and Imperial Brands offer very high yields (7–10%) but face structural volume decline as smoking rates fall globally. The yield compensates for the earnings decline risk — this is a "value trap" for some investors and a genuine income opportunity for others.

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FTSE 100 vs S&P 500: Long-Run Performance

In sterling terms, the FTSE 100 total return (including reinvested dividends) over 20 years to 2025 has been meaningfully positive — dividends have contributed significantly. However, the S&P 500 total return in sterling terms has substantially outperformed over the same period, driven primarily by the US technology sector's extraordinary growth.

Investors who benchmarked against the S&P 500 and held only FTSE 100 equities have underperformed significantly on a 10-year view. However, past structural factors (zero interest rates enabling technology valuations, US tech monopolisation of digital markets) may not repeat to the same degree in the next decade, and the valuation starting point for US equities is materially higher.

The prudent position for an international investor is to hold both, in proportions that reflect their overall risk tolerance and conviction — not to exclude either on historical performance grounds alone.

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How to Invest in the FTSE 100

ETFs

• iShares Core FTSE 100 UCITS ETF (ISF): The most popular FTSE 100 ETF by assets, listed on the London Stock Exchange. TER 0.07%. Distributing share class (pays dividends quarterly).
• Vanguard FTSE 100 UCITS ETF (VUKE): Vanguard's equivalent, TER 0.09%.
• Accumulating share classes: Both iShares and Vanguard offer accumulating share class versions that reinvest dividends internally — relevant for investors in growth mode rather than income mode.

For non-UK investors, equivalent products are available on other European exchanges (Euronext Amsterdam, Xetra) in various currencies with currency-hedged share classes.

Investment Trusts

Several long-established UK investment trusts track or actively manage UK equities:

• City of London Investment Trust (CTY): One of the oldest investment trusts in the world, with a near-60-year consecutive dividend increase record (its dividend for the year to June 2026 marked the 60th consecutive annual increase). Actively managed, predominantly FTSE 100 holdings, yield approximately 5%.
• Merchants Trust (MRCH): High-income UK equity focus, yield approximately 5.5%.
• Finsbury Growth & Income Trust: Managed by Nick Train, concentrated portfolio of high-quality UK franchises — different risk profile from income trusts.

Investment trusts can trade at discounts or premiums to NAV, providing opportunities (and risks) not present in ETFs.

UK Equity Income Funds (OEICs)

Active UK equity income funds offer professional stock selection focused on dividend-paying companies. Well-known funds include Artemis Income, Threadneedle UK Equity Income, and Schroder Income. These typically charge 0.5–0.8% OCF (ongoing charges figure) and have managers with defined investment philosophies.

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Tax Considerations for International Investors

UK withholding tax on dividends: The UK does not levy withholding tax on dividends paid by UK-listed companies to non-resident shareholders. This is a significant advantage for international investors compared to, say, German, Swiss, or US equities, where withholding taxes (15–35%) are common.

UK Stamp Duty Reserve Tax (SDRT): A 0.5% stamp duty is payable on purchases of UK shares (not ETFs purchasing on behalf of investors). ETF investors are not directly affected; investment trust purchases incur stamp duty.

CGT for non-UK residents: UK capital gains made by non-UK resident individuals on UK equities are generally not subject to UK CGT (with exceptions for UK residential property). This makes FTSE 100 equities attractive for investors living abroad — gains are taxable only in the investor's country of residence (subject to applicable tax treaties).

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How Global Investments Can Help

Global Investments works with UK-based and internationally mobile investors who hold or are considering UK equity exposure. We can help you assess the appropriate role for FTSE 100 equities within a globally diversified portfolio, select between ETF, investment trust, and active fund vehicles depending on your income versus growth preference, and ensure holdings are structured appropriately for your tax position and domicile. For non-UK resident clients, we can advise on the specific withholding tax and CGT implications in your jurisdiction of residence.