Do You Want Commodities? Buy The FTSE 100!

: Published on Tuesday, 05 July 2011

Last month the FTSE 100 acquired a new member, Glencore International and, to keep the numbers right, expelled its smallest constituent, Invensys.

Glencore owns a variety of stakes in unquoted and quoted resource companies, including 34% of Xstrata, a Swiss-headquartered miner which is already a constituent of the FTSE 100. Glencore also runs commodities trading and logistics businesses, which draw on information gleaned from its resource investments. The stock market valuation put on Glencore is about £36bn – not bad for a company which only began life in 1974.

The FTSE 100’s heavy weighting towards commodities has two important consequences:

It means that the index is not the measure of the UK’s economic health that it is often thought to be. Indeed, some wags have suggested it is more a yardstick for the Chinese economy, which is currently the main driver behind increased demand for all types of commodity.
Funds which track the FTSE 100 and, to a slightly lesser extent, the FTSE All-Share, will replicate this high commodity exposure. They are thus not purely an investment in UK companies and are potentially higher risk than might be imagined.

The London Stock Exchange’s success in attracting listings of companies from around the globe has had some strange effects on indices. A stock market index more closely aligned with UK plc, is the FTSE 250, which covers the 250 companies immediately below the Footsie’s constituents.

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