FTSE 100 ETFs in focus as UK index completes quarterly review

Jun 2nd, 2016 | By | Category: Equities

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Index provider FTSE Russell has announced changes to the FTSE 100 Index, the flagship reference for large cap blue-chip stocks listed in the United Kingdom. Following a rules-based process, this quarter’s review will see only one constituent in the index being replaced. The move is set to prompt significant buying and selling activity amongst a wide range of exchange traded funds that currently track the prestigious index.

FTSE 100 ETFs in focus as premier UK equity index completes quarterly review

The FTSE 100 Index is the UK’s premier reference for large-cap equity performance. The index tracks the top 100 firms by market capitalisation listed on the London Stock Exchange.

Effective Monday, 20 June 2016, satellite communications company Inmarsat will be relegated from the index in favour of multinational pharmaceuticals firm Hikma Pharmaceuticals.

Helal Miah, Investment Research Analyst at the Share Centre, said: “The relegation of satellite communications company Inmarsat was highly anticipated by us at The Share Centre. The group posted flat annual results in March, reflecting a tough environment where governments are constrained in spending on communications equipment. Profitability was also partially hurt by capital expenditures on the launch of satellites and new services. Management has predicted limited growth for 2016 but does foresee improvement in the medium to longer term. A recent profit warning by a rival company spread fear across the sector, sending the shares down further and ultimately to its relegation. We are however, encouraged by the company’s long term prospects and continue to recommend Inmarsat as a ‘buy’ for medium risk investors seeking a balanced return.”

Commenting on the inclusion of Hikma Pharmaceuticals into the prestigious index, Miah said: “Hikma Pharmaceuticals was initially downgraded in March courtesy of a reduction in profitability expectations, as its takeover of the US generic drug group Roxane ran into difficulty, resulting in a fall in its share price. The market now believes that investors have moved on from this issue, now focussing on the longer-term benefits associated with the company. The group’s shares have recovered following positive results after the previous reshuffle and investors should appreciate that the group is a generic manufacturer and is gaining from consumer demand for cheaper drugs. Our view on the company remained a ‘buy’ throughout the downgrade period as we believed there is a fast growing market for cheaper, generic drugs. We continue with this recommendation and at present believe it is a good investment idea for investors seeking capital growth and willing to accept a medium to higher level of risk.”

Miah believes certain current FTSE 100 constituents, notably theme-park and public attractions owner Merlin Entertainment, barely escaped relegation during the current review.

“Merlin Entertainments have been given a reprieve in this review, despite the troubled year it has experienced,” added Miah. “We believe however, that its status in the top league will not be secured unless there is a material recovery in its share price. Otherwise, some strong candidates will replace it in the next review in three months’ time.”

The methodology behind the FTSE 100 review is designed to ensure that firms are not added or removed based on recent price fluctuations but rather on longer-term structural trends. As of the index review date, any previously excluded firm will only be granted admission if their market cap is ranked 90th or above in terms of market cap and any company currently constituting the index may only be demoted if their market cap has sunk to a rank of 111th or below.

The largest ETF (in terms of assets under management) tracking the FTSE 100 Index is the iShares Core FTSE 100 UCITS ETF (ISF), with over £3.7bn in AUM as of 1 June 2016. It is also one of the cheapest means of accessing the index with total a total expense ratio of just 0.07%. Other significant ETFs referncing the FTSE 100 Index include the Vanguard FTSE 100 UCITS ETF (VUKE), which holds over £2.1bn in AUM and carries total fees of 0.09%; and the UBS FTSE 100 UCITS ETF (UBO3), holding over £110m in AUM and carrying a total expense ratio of 0.20%.

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