Is It Time To Ditch The FTSE 100 And Pile Into The FTSE 250?

Is the FTSE 250 (INDEXFTSE:MCX) a better option than the FTSE 100 (INDEXFTSE:UKX) right now?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While the FTSE 100 is considered to be the crème de la crème of UK listed companies, the reality is that the FTSE 250 has offered far superior returns in recent years. For example, the mid-cap index has risen by 69% in the last 10 years, while the large-cap index is up by just 3%. As such, investing your hard-earned cash in a range of FTSE 250 companies could have yielded a return 23 times higher than having invested the same money in FTSE 100-listed companies.

Of course, one argument for the FTSE 100 has been its superior liquidity by its very nature. The FTSE 100 contains the biggest 100 companies by market cap in the UK and they therefore tend to have better liquidity and smaller spreads (the difference between the buying and selling price) than their smaller peers. However, for the level at which most private investors trade (i.e. in the thousands, rather than millions), the FTSE 250 offers more than adequate liquidity. This means that there’s in reality not a great deal of difference between the top and the bottom of the FTSE 350 when it comes to liquidity.

Volatility

Furthermore, the lack of volatility of the FTSE 100 is often considered to be a major selling point. In other words, because the FTSE 100 contains larger and generally more mature companies, it’s not subject to the same degree of volatility or company-specific risk as is the case for the FTSE 250. This apparently makes the returns for investors in the FTSE 100 more predictable and resilient, although the returns of the two indices in the last 10 years highlight that this doesn’t appear to be the case.

For example, the maximum loss experienced by an investor buying shares in the FTSE 100 10 years ago would have been 37%, while for the FTSE 250 that figure is only slightly higher at 44%. For most investors, the maximum gain during that period of 83% for the FTSE 250 versus 18% for the FTSE 100 makes the slightly higher level of volatility of the former well-worth it in the long run.

Income

Clearly, the FTSE 100’s income prospects are better than for the FTSE 250. The former has a yield of 4%, while for the latter it’s considerably lower at 2.7%. However, a number of shares within the FTSE 250 have yields higher than 4%, so it’s still possible to generate a 4%-plus yield within the FTSE 250. And with their profitability often growing at a faster rate than is the case for their larger peers, FTSE 250 stocks may be better able to grow dividends at a rapid rate too.

Despite this, the FTSE 100 remains a superb place to invest. It has delivered a total annualised return of over 9% since its inception in 1984 and so has the potential to deliver a similar performance in future. However, the FTSE 250 remains at least as appealing as the FTSE 100 and this means that having a mixture of stocks from both indexes within a portfolio seems to be a sound move for long-term investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »

Investing Articles

2 passive income shares to consider for December 2024 onwards?

These are popular UK shares investors often buy for passive income from dividends, but are they actually good investments now?

Read more »

Young black woman using a mobile phone in a transport facility
Investing For Beginners

Down 34% in a month, is this FTSE 100 stock going to be demoted?

Jon Smith flags a FTSE 100 company with a recent poor performance he believes could see it soon drop out…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Is the Diageo share price set to make a stellar comeback in 2025?

Harvey Jones thought the Diageo share price looked good value when he bought it after last year's profit warning, but…

Read more »

Investing For Beginners

It’s down 50%. Would it be madness for me to buy this value stock?

Jon Smith notes down a household value stock in the FTSE 250 that he thinks can rally in the long…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

Up 70% and 80%! I’m thrilled I bought these two red-hot UK stocks exactly 1 year ago

Harvey Jones bought two UK stocks at the end of November last year, and both have smashed the market in…

Read more »

Investing For Beginners

Consider filling an empty Stocks and Shares ISA like this to hit five figures of second income

Jon Smith outlines how he could use stocks with both income and growth prospects to grow a Stocks and Shares…

Read more »

Investing Articles

These FTSE 100 shares could soar over the next year

FTSE 100 shares show strong potential as rate cuts loom. History shows stocks could gain more than 70% in the…

Read more »