The FTSE 350, or Financial Ties Stock Exchange 350, is a lesser-used stock market index that combines the FTSE 100 and FTSE 250 together. It consists of the largest 350 companies by market capitalisation listed on the London Stock Exchange. And this guide explains how to invest in the FTSE 350.
The index contains a wide range of businesses that vary in size. This includes large-cap, mid-cap, and some small-cap stocks as well. Collectively the combined market cap of all shares within the FTSE 350 represents approximately 60% of the total value of UK equities.
How to invest in FTSE 350?
Investors cannot directly invest in a stock market index like the FTSE 350. Why? Because these aren’t tradable securities, merely benchmarks created by financial institutions to judge the overall performance of specific sectors or stock types.
However, investors can indirectly invest in the companies that make up the FTSE 350 thanks to the creation of index funds. With that said, let’s go through the step-by-step process of buying shares in a FTSE 350 index fund.
1. Open a brokerage account
An investor must have a brokerage account to access and invest in the financial markets. These are sometimes referred to as investment accounts.
There are various types of brokerage accounts to choose from. And each offer different features, advantages and drawbacks. Investors must consider their personal circumstances and intended investing strategy when deciding what type of account is suitable.
- Standard Account – This is the most common type of investment account. Investors deposit capital which can then be used to invest in an array of financial products, including stocks, bonds, mutual funds, trusts, and ETFs. In the United Kingdom, all capital gains and dividends received through investments in a standard trading account are subject to tax.
- Employer-Sponsored Retirement Account – This is a special investment account with certain tax benefits. However, withdrawals from this account are limited until investors reach a certain age. They are designed to be a saving instrument for pensions. The most common type of employer-sponsored retirement account in the United States is a 401(k).
- Stocks and Shares ISA Account – This is a special tax-efficient investment account for British investors only. All capital gains and dividends received from investments within a Stocks and Shares ISA are tax-free. However, investors are limited to depositing a maximum of £20,000 per year.
- Self-Invested Personal Pension (SIPP) Account – This is a particular tax-deferred investment account for British investors only. Capital gains and dividends received from investments are protected from tax. However, investors cannot withdraw any funds until reaching the age of 55 (57 from 2028). When funds are taken out, they are taxed as regular income.
2. Pick an index fund
With an investment account open, the next step is to pick a suitable index tracker fund. For individuals seeking to invest in the FTSE 350, a FTSE 350 index tracker fund is required. However, investors also need to consider what type of index fund they want to own – a mutual fund or exchange-traded fund (ETF).
A mutual fund is not traded on an exchange. Instead, orders to buy and sell shares within a mutual fund are settled once daily at the end of each trading session. On the other hand, ETFs are traded on an exchange and orders are executed instantly.
Investors should be aware of other differences between the two investment vehicles. We’ve written a complete guide that can be accessed below.
Beyond deciding on the index fund type, additional factors must be considered.
- Expense Ratio – As index tracker funds are typically passively managed, the annual management fees are reasonably low. However, they are not zero. And some may even charge entry fees when first buying shares or exit fees when selling shares. The expense ratio combines all these costs, adversely affecting the overall investment return. On average, the expense ratio of a passive fund typically lies between 0.05% and 0.15%. Generally speaking, investors should focus on the funds that charge the lowest fees.
- Minimum Investment Requirements – Some index tracker funds require investors to purchase a minimum amount of shares. This is typically more common among certain mutual funds rather than ETFs. Nevertheless, minimum investment requirements could create barriers to entry for lower net-worth investors.
- Dividends – All shareholders in an index fund are entitled to receive dividends from the companies inside the fund’s investment portfolio. However, depending on the dividend policy, any received income may be automatically reinvested into the fund’s portfolio rather than distributed to shareholders’ investment accounts. This type of dividend policy is more commonly referred to as accumulation.
An investor could reduce their expense ratio to zero by not investing in an index fund but instead buying the individual stocks of the index themselves.
However, this approach would likely rack up many transaction and commission fees in practice. It also requires more effort as portfolio rebalancing would no longer be handled by a professional fund manager but rather the individual investor themselves. In other words, taking this alternative approach is unlikely to be cost-effective.
3. Buy shares in the index fund
With a brokerage account opened and an FTSE 350 index fund selected, investors can now buy shares and replicate the index’s performance.
As a reminder, if shares in a mutual index fund are purchased, the transaction will not be executed until the end of the current or next trading session. However, trades for an index ETF will be executed instantly while the stock market is open.
Advantages of investing in the FTSE 350
Buying shares in a FTSE 350 index fund provides several advantages to passive investors.
- Instant Diversification – Investing in a FTSE 350 index fund is the equivalent of buying shares in each company within the index. As such, an investor’s portfolio can be considered diversified even with a single position.
- Minimal Effort – The UK stock market has historically always increased over long periods. And by owning a small piece of the largest 350 companies on the London Stock Exchange, investors can capitalise on these tailwinds with minimal effort.
- Low Fees – As index funds are passively managed and usually run by automated trading algorithms, the annual management fees and, in turn, the expense ratio is relatively low compared to an actively managed mutual fund.
Disadvantages of investing in the FTSE 350
The FTSE 350 has historically provided slightly better returns than the FTSE 100 without adding too much additional risk. However, it’s not without some drawbacks.
- Limited Growth – The FTSE 250 is a market capitalisation-weighted index. That means the largest companies have the most influence over the index’s performance which don’t exactly have a reputation for delivering stellar growth. While the index also provides exposure to mid-cap and small-cap stocks, the capitalisation weighting gives these smaller companies relatively minimal influence over the direction of the index.
- No Control – Index tracker funds do not have a stock selection criteria beyond a business being a constituent of the index being tracked. As such, it’s possible for investors to indirectly own shares in companies that may not align with their ethical or moral values. For example, there are several tobacco stocks within the FTSE 350. However, there is no way to avoid these businesses when buying shares in an index fund.
Can I lose money by investing in the FTSE 350?
Buying shares in a FTSE 350 index fund is the equivalent of buying a small stake in each constituent of the FTSE 350. This type of investment provides ample diversification across industries and geographies. However, that doesn’t make it risk-free.
FTSE 350 businesses don’t always succeed. And when earnings suffer, the share price eventually follows suit, causing the index to stumble or even tumble if one of the larger enterprises becomes compromised.
Looking at the long-term performance of the index, it has increased by an average of 7.9% per year. However, depending on the timing of an investment, negative returns can materialise due to general market risk. Therefore, yes. It’s possible to lose money.
Top 10 FTSE 350 stocks
Below are the top 10 FTSE 350 companies in order of market capitalisation as of 15 January 2023.
|8||British American Tobacco||BATS||£70.93bn|
Alternatives to the FTSE 350
The FTSE 350 is one of many stock market indices that investors can choose to track or use as a benchmark.
- FTSE 100 – The stock market index tracks the performance of the largest 100 UK stocks by market cap.
- FTSE 250 – This stock market index tracks the performance of the 101st to the 250th largest UK stocks by market cap.
- FTSE AIM 100 – This index includes the largest 100 UK stocks by market capitalisation, which have their primary listing on the Alternative Investment Market (AIM).
- S&P 500 – This stock market index tracks the stocks of 500 large-cap US companies
- Dow Jones Industrial Average – This stock market index tracks the performance of the 30 largest and most prominent companies.
The bottom line
Investing in the FTSE 350 has a lot of benefits for beginner investors looking to get started on their investing journey. It hands many of the portfolio management responsibilities off to a professional fund manager without having to pay large fees.
However, the returns the index provides may not be suitable for an individual pursuing a high-growth strategy. Additionally, the risk factors of investing in the stock market, even through an index, may not be appropriate for a conservative investor seeking to protect their wealth rather than expand it.
All of this is to say, buying shares in a FTSE 350 index fund for the long run may be a smart investment provided it matches an investor’s objectives, risk tolerance, and time horizon.
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This article contains general educational information only. It does not take into account the personal financial situation of the reader. Tax treatment is dependent on individual circumstances that may change in the future, and this article does not constitute any form of tax advice. Before committing to any investment decision, an investor must consider their individual financial circumstances and reach out to an independent financial advisor if necessary.