One of the main selling points of index-tracking products is diversification. If you buy an exchange-traded fund tracking the FTSE 100, you are indirectly buying a little bit of the largest 100 stocks with a primary London listing, weighted by their relative size. Your risks are spread.
If instead you just buy Admiral (ADM) (the index’s median constituent by size), you will lack diversification. Suddenly, the outlook for the UK’s car insurance sector shifts from a rounding error to the defining driver of your capital returns. It might pay off, but it’s a riskier move.
That’s not the only benefit of a tracker product. By selling stocks that drop out of an index (and buying those that grow into it) an ETF takes care of fiddly readjustments. In theory, albeit at the margins and only over time, this allows the investor to gradually benefit from sources of growth and cut losers.