How the FTSE 100 has changed over the past decade
The last decade has been far from plain sailing for investors, who have had to contend with various headwinds. Most notably the global financial crisis from peak to trough saw the FTSE 100 index, which represents the average performance of the 100 largest companies listed on the London Stock Exchange, fall 40%.
Since the crisis this popular index, which many investors will be following if they hold a UK tracker fund, has changed considerably in terms of its constituent companies. The latest reshuffle resulted in Hikma Pharmaceuticals being reinstated after a three-month hiatus, in place of Inmarsat, which rejoined the index exactly a year ago.
The demotions and promotions, which take place each quarter, over time alter the make-up of the index, particularly the sector weightings (the proportion of the index taken up by each sector of the stock market such as oil companies, banking, aerospace, healthcare and construction).
Research by broker AJ Bell looked at how the index has changed since 2006. The broker notes there have been more than 400 changes that have taken place since the index was launched in 1984.
Banks and oils still dominant
The key finding from the research was that over the past decade banks and oil shares have seen their influence over the FTSE 100 decrease the most.
AJ Bell found that the banking sector's weighting in the index now stands at 11.1%, as opposed to 20.8% a decade ago. This represents an almost 10% decline. Oil shares, meanwhile, have seen their weighting slip 6.3%, from 19.3% in 2006 to 13% today.
They still dominate the index, though, with pharmaceuticals the third largest sector at 9.1%.
It is also worth pointing out that banks could be in for a revival in the coming years, with two 'challengers', CYBG (the holding company for Clydesdale Bank and Yorkshire Bank) and Metro Bank, on a rapid rise having been promoted to the FTSE 250 after only floating last year.
Tobacco firms have become a much bigger part of the index, as their weightings have increased 3.5%, to 6.2%, over the past decade.
Beverages (2.8%) and travel & leisure and support services (both 2.6%) come in just after.
Russ Mould, investment director at AJ Bell, says: “The most dramatic changes to the index tend to occur when a sector is hot or is falling from grace.
“These trends can lead to a rash of promotions or demotions, trends which can make or cost investors money if they are (or are not) spotted soon enough.
“Despite their significant falls in influence, oil and banking stocks remain the two largest sectors in the FTSE 100 and so are of huge importance to its future performance, particularly relevant for retail investors in products that track the performance of the index.”
This story was originally written for our sister magazine, Money Observer.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.