Which is better for 2019, the FTSE 100 or FTSE 250?

Why I think you could be on a loser if you switch from the FTSE 100 (INDEXFTSE: UKX) to the FTSE 250 (INDEXFTSE: MCX) 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.

Traditionally, the FTSE 100 has been seen as the prime target for income investors, while the FTSE 250 is considered the better index for finding growth prospects.

That makes a lot of sense, as a company needs to achieve a market capitalisation of around £4bn to break into the top index, while its smaller cousin is home to companies as small as £200m or so.

Recent statistics have borne that out.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Small winners

In the five years to July last year, the FTSE 100 managed a gain of 21%. Not too shabby, but over the same period the FTSE 250 almost doubled that with 41%.

And though top-tier dividend yields were higher, the FTSE 250’s overall annual returns remained a few percentage points better than the FTSE 100’s. The answer is clear, if unsurprising — if you’re looking for growth, you should invest in smaller companies.

But those who saw the trend and changed horses last summer might now be thinking they’ve missed the boat, as the 250 has been giving up some of its relative gains.

I can see that trend continuing, and I expect the FTSE 100 to provide better overall returns over the next few years. Here’s why…

Big troubles

Over the past decade and more, two of our biggest FTSE 100 sectors have been hammered.

Oil giants Royal Dutch Shell and BP are our largest and fourth largest companies respectively, with Shell around twice the market cap of BP. While BP has been through its own disaster in the Gulf of Mexico, the oil slump and continuing weak prices have helped hold share prices down for both.

HSBC Holdings is in third spot, and banks are still depressed from the crisis even now. Also in the top 10 we have a big pharma pair, and a handful of miners — the former have been in a new drugs slump for a while, and the commodities sector has been up and down following the vagaries of worldwide supply and demand.

As my colleague Rupert Hargreaves noted, during that time the UK economy was doing relatively well (with the free markets of the EU playing a big part in our success, in my opinion), and that’s good for smaller UK firms.

But how things have changed in just a couple of years. Being yanked away from the EU could seriously put the UK’s economic growth on hold, with forecasts already having been pared back.

Value showing

On top of that, there are growing signs that FTSE 100 companies are increasingly oversold and are becoming better and better value. The clue is in the dividends.

By the end of 2016, the FTSE 100 was offering dividend yields of around 4.2%, which was ahead of its long-term average, suggesting top shares were already looking undervalued even then.

Wind that forward to today, as earnings and dividends have kept on growing and share prices have stagnated, and we’re looking at forecast yields of around 4.9%.

That’s astonishingly high, and such a disjoint surely can’t last for ever. With both indexes performing nicely so far in 2019, I really can see a period of FTSE 100 outperformance ahead of us. Headline performances might well stay close together, but I think the top index’s superior dividends should make for better overall returns.

This AI stock is becoming a digital juggernaut in a £ 12.5 billion market!

🤖 Curious about the next big player in AI? 🤖

Our leading industry analysts have uncovered a trailblazing content platform that's revolutionising the industry with its unparalleled generative AI technology, setting new standards in creativity and efficiency.

Care for a sneak peek?

Trusted by global giants like Amazon, Disney, and Netflix, this innovative company is not just transforming digital media with AI-generated 3D content but is also capturing a significant share of a £12.7 billion market!

With a remarkable 62% gross margin, indicating exceptional profitability and operational efficiency, this company's growth trajectory positions it as a must-watch for savvy investors.

Best of all, we're offering exclusive access to the name of this game-changing stock, absolutely free!

Discover your free AI stock pick

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 high-yield dividend shares to consider buying for a retirement portfolio

Dividend shares can provide retirees with regular passive income in their golden years. Our writer picks out three with yields…

Read more »

Investing Articles

Tesla stock has halved. Could it now double – or halve again?

After a wild few months for Tesla stock, Christopher Ruane weighs some pros and cons of the investment case. Could…

Read more »

Investing Articles

Does it make sense to start buying shares as the stock market wobbles?

Does a rocky stock market make for a good or bad time to start buying shares? This writer reckons it…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£15k of passive income a year? It’s possible with the right dividend strategy!

To figure out how much dividends are needed for a lucrative passive income stream, investors must understand which strategies get…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

As US markets wobble, I’m listening to Warren Buffett!

The long career of billionaire investor Warren Buffett has included plenty of market turbulence. Here's what our writer's learnt from…

Read more »

UK money in a Jar on a background
Investing Articles

5 shares yielding over 5% to consider for a SIPP

Christopher Ruane introduces a handful of FTSE 100 and FTSE 250 shares he thinks an income-focussed SIPP investor should consider.

Read more »

Investing Articles

Here’s how an investor could invest a £20k ISA to target £1,500 of passive income per year

Can a £20,000 ISA throw off close to £30 per week on average of passive income when invested in blue-chip…

Read more »

Investing Articles

As gold hits $3,000, this FTSE 100 stock is primed for blast off

As Western institutions scramble to get as much gold as they can lay their hands on, Andrew Mackie believes this…

Read more »