Many years ago, I came across the old adage: “FTSE 100 for income, FTSE 250 for growth.” The idea is that growth companies make their way up through the FTSE 250, and finally reach the FTSE 100 where they mature and turn to paying bigger dividends.
I often also hear the claim that the FTSE 250, perhaps as a result, tends to outpace the FTSE 100. That sounds plausible, if the smaller-cap index contains more growth companies. But wait, doesn’t the FTSE 250 lose out and fall back every time one of its stocks grows too big and makes it into the top index?
I took a look back at the two indexes since their inception in 1984, and I was surprised by what I saw. To date, the FTSE 250 has indeed outstripped the FTSE 100. But it’s only a relatively recent phenomenon. Up until 2003, the two indexes were pretty much neck and neck. And only since then have the mid-cap companies of the FTSE 250 pulled ahead of their bigger cousins.
FTSE 100 pulling back
The two came close to convergence again by 2009, during the financial crisis. The UK’s top banking and insurance giants are all FTSE 100 companies. So there’s no real surprise that’s where the carnage happened.
The ongoing weakness of the financial sector, being hit hard by Brexit and then by Covid-19, probably helps explain the rapid outperformance of the FTSE 250 since then. Climate change has likely played a part too, with big oil companies suffering. After all, the top of the index was long dominated by Shell, BP and the banks.
But what’s been happening more recently? Well, the pandemic-driven stock market crash hit the FTSE 250 more heavily. But it’s already recovered more strongly and is back in the lead.
Since mid-February 2020, we’re looking at a gain of 3% compared to a loss of 6% for the FTSE 100. Again, I can’t help thinking the banking factor has played a significant part. Without the banks, I think the two indexes would have been closer together.
A strong FTSE 250 future?
For the rest of 2021 and beyond? I can see financial sector weakness continuing. Barclays, with its wider international reach and its investment banking exposure, looks like being the exception. But the other big names are still suffering, and I reckon Brexit could weigh heavily on them for some time yet. The UK’s departure agreement might have secured tariff-free movement of goods, but it doesn’t cover services.
I do think we could see the FTSE 250 beating the FTSE 100 again over the next few years. One thing a stock market meltdown can do is open up possibilities for smaller and more nimble companies. Brexit looks sure to bring changes in the UK economy, and that too could open up possibilities for smaller cap companies.
I prefer to focus on individual companies, and I’ll buy what I think is a good stock no matter which index it’s in. Saying that, in the next few years, I think I could be seeing more attractive smaller companies than usual.
