American investors are notorious for staying close to home with their money. The most you can expect the majority of U.S. investors to do is to pick American stocks that have worldwide exposure. That's one reason the Dow Jones Industrial Average
But if you rely solely on U.S. stocks, you'll miss out on a world of other opportunities. So this article is the first of a series looking at popular indexes in other countries to try to find promising stocks you might otherwise miss. Today, let's look at Great Britain and its FTSE 100
Getting to know the FTSE
Although the FTSE has more stocks than the Dow, the way the FTSE is weighted means that a similarly small number of its components have an inordinate amount of influence. Just the top 10 stocks in the index by market cap account for nearly half of the index's value. Still, because the FTSE uses market-cap weighting, it doesn't have some of the complications that the Dow's price-weighted calculations create.
Like the Dow, the FTSE is fairly well balanced across sectors. In fact, one way in which the FTSE outdoes the Dow is by including utility stocks in the index, rather than exiling them to a separately tracked metric. Still, the two largest sectors in the FTSE are oil and gas stocks and financials, with consumer goods coming in a close third.
What's working in Britain?
Looking at the top 10 stocks in the FTSE, you'll find clear winners and losers. On the gaining side are the more defensive names GlaxoSmithKline and British American Tobacco, both of which are up 20% or more over the past year. Glaxo is dealing with the same challenges that U.S. pharmaceutical companies are facing, as it tries to keep a healthy pipeline of new drugs in development to replace existing blockbusters that are approach their patent expiration dates. Meanwhile, British American has many of the same benefits as Philip Morris International, as it taps markets outside the U.S. that have favorably tolerant regulatory environments.
On the downside, however, are the big mining companies Rio Tinto
Meanwhile, stuck in the middle are a variety of companies. Notorious oil giant BP
Can the FTSE beat the Dow?
Over the past five years, the Dow has performed better than the FTSE on a price basis. But the FTSE has a higher overall dividend yield, with one FTSE-tracking ETF yield well over 3%, compared with around 2% for the Dow. So on a total return basis, the disparity isn't as great as it may appear at first glance.
It's clear that British markets trade more in line with exchanges on the Continent than the U.S. stock market does, so what could lead to future FTSE outperformance would be a better-than-expected recovery in Europe. With expectations extremely low, betting on the FTSE to rebound could be an idea worth looking at more seriously, especially if conditions in Europe's weaker economies begin to stabilize.
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