HEAD OF DERIVATIVES, GFT
THE FTSE 100 index CFD has always been one of the most popular CFDs for UK traders. It is, after all, the blue chip index that gets the most media coverage. Yet if you really want to trade a UK index, it’s not the FTSE 100 you should be following at all.
Although it lists the UK’s largest companies, the FTSE 100 index is not very reflective of the wider UK economy. Many employ relatively few British workers and their revenue stream is predominantly from abroad. For those who want to trade an index which is more reactive to domestic news and economics, you need to look elsewhere.
For example, to a FTSE 250 index CFD. This is actually not widely available among CFD providers, due to the lack of a reliably liquid corresponding futures contract from which to derive a price, but GFT launched its version last week. GFT’s “UK 250” market is based on the level of the underlying index and has a fixed 20 point spread.
Trading the mid-cap index requires a different approach to the export-dominated FTSE 100. About half of the index is weighted towards industrial goods and services, retail, leisure and travel. (eg Whitbread, Rentokil Initial, Taylor Wimper, Burberry). This more UK-centric index of second-liners has few defensive constituents. As a result, it has been particularly sensitive to the recession and posted its worst year in 2008.
Nevertheless, two decades ago when the two indices were created, they started from the same base of 1,000. The mid-cap index is now around 8,900 while its bigger cousin is still around the 5,000 level, having benefitted from much higher rates of M&A activity than in the blue chip index.
For those of us who believe that correlations in financial markets can’t stay out of kilter indefinitely, there’s now an opportunity to trade on the chances of that outperformance ending – by shorting the UK 250 index and buying the UK 100. With such “pairs trades” as they are known, make sure your exposure to each index is the same. So if you buy 10 CFDs of the UK 100 at 5,000, you should only buy £5.61 CFDs of the 250 index. This way you are market neutral, but are trading the relative performances of the two indices.