Five simple ways to beat the FTSE 100

UK stocks and shares have not been great hunting ground for long-term investors over the past year. If you had invested £100 in the FTSE 100 index a year ago, even with dividends paid you would have just £91 today, i.e. a loss of 9% over the year.

But fear not. I have listed below five simple ways that you can invest in a single cheap fund and easily beat the FTSE, based on performance since the start of 2015.

1) Buy the FTSE 100 Minimum Variance ETF

The first way to beat the FTSE is to buy an exchange-traded fund (ETF) that only holds the lower-risk companies within the FTSE 100.

This is what the Ossiam ETF FTSE 100 Minimum Variance ETF (code: UKMV) does. While this fund actually holds most of the companies in the FTSE 100, it holds more of the safer shares, and fewer of the riskier ones.

So in theory, when the stock market falls, this ETF should fall by less given its lower overall risk exposure.

And as you can see from Chart 1, this Minimum Variance ETF generated a 9% return from 1 January 2015 while the FTSE 100 actually lost 1%.

2) Buy the FTSE 250 index ETF

The second way to beat the FTSE is to buy an exchange-traded fund (ETF) focused on mid-cap companies, i.e. those companies that are not quite big enough to get into the top 100 UK company list by size, but instead represent companies from 101 to 350 on the size list.

This is what the x-tracker FTSE 250 UCITS ETF (code: XMCX) does. This ETF holds all 250 mid-cap UK companies in the FTSE 250 index, representing a variety of different industries, led by companies such as Smiths Group, Croda, Rightmove and Auto Trader.

And as you can see from Chart 2, this FTSE 250 ETF generated a 7% return from 1 January 2015, 8% percentage points ahead of the FTSE 100.

3) Forget shares, buy government bonds

Lending money to the UK government over the long term through the purchase of UK government bonds (also called gilts) has been a profitable activity of late, with government bonds all over the world performing well.

The SPDR Barclays 15+Year Gilt UCITS ETF (code GLTL) is an easy one-stop-shop fund for buying exposure to these government IOUs, with a current dividend yield of 2.25% per year.

As Chart 3 demonstrates, this gilt ETF has far outstripped the FTSE 100 since the middle of last year, posting a 2015-16 return thus far of 11.5%.

4) Go for gold

Gold has truly glittered this year. While it did very little over 2015, since the turn of the year the price of an ounce of gold in pounds sterling has leapt by around 22%. Over 2015-16 as a whole, the ETF Securities Physical Gold ETN (code BULP) would have made you £14 per £100 invested at the beginning of the period (Chart 4).

5) Small-Cap gems are the best of the lot

But I have saved the best performer for last. The Diverse Income Trust (code DIVI) is an investment trust (a listed fund) run by the fund management company Miton. It invests in smaller companies that have a good income yield now from dividends, or that are growing their dividends quickly (Chart 5). So it combines the two elements of dividend income with a strong long-term growth perspective.

This fund has performed particularly well, up 18% over 2015-16, hardly suffering from the FTSE's slide from mid-2015 onwards.

Bottom line: You don't have to shun stocks and shares just because the headline FTSE 100 index has done poorly. Here are five low-cost funds investing in different ways, that have performed well in the recent past, and which could continue to do so in the future (no guarantee, mind you!).

If you want diversification in your investments, you could even consider buying a little of each of these funds.