When it comes to mainstream stock market indexes, the FTSE 250 is near the top of the list for most British investors, right behind the FTSE 100. The index is often used as a portfolio benchmark and acts as a good proxy for the overall performance of small- and medium-sized companies.
Here’s everything investors need to know about the index, what companies it contains and how to invest in it.
What is the FTSE 250?
The FTSE 250 is a stock market index that contains the 101st to the 350th largest companies listed on the London Stock Exchange.
It’s ordered and weighted based on the market capitalisations of its underlying companies. This means the most prominent firms within the index have the most influence over its value.
The index level is calculated in real time throughout the trading day and changes in line with the movements of its constituents’ share prices. So, if the majority of FTSE 250 stocks rise, so will the level of the index, and vice versa.
Companies near the bottom of the list are most likely to drop out of the index and be replaced with newcomers if their market capitalisation falls. Similarly, as a company grows, it can begin to climb its way up the ranks to the top of the list. If the businesses near the top continue to grow, they may become large enough to secure a spot in the FTSE 100.
Company positions within the index are adjusted every quarter in March, June, September, and December.
Who are the FTSE 250 companies?
The firms inside the FTSE 250 are not the biggest in the UK. However, they are still well-established enterprises, and many are household names.
As of September 2022, the top 10 FTSE 250 companies were:
- Weir Group (LSE:WEIR)
- Mediclinic International (LSE:MDC)
- Beazley (LSE:BEZ)
- Johnson Matthey (LSE:JMAT)
- IG Group Holdings (LSE:IGG)
- Greencoat UK Wind (LSE:UKW)
- RIT Capital Partners (LSE:RCP)
- IMI (LSE:IMI)
- Hiscox Limited (LSE:HSX)
- Diploma (LSE:DPLM)
What’s the difference between the FTSE 100 and the FTSE 250?
The FTSE 100 is arguably the most popular British stock market index. It works the same was as the FTSE 250, but includes different companies.
The FTSE 100 index is home to the largest 100 companies listed on the London Stock Exchange. Its constituents are usually industry titans, so the index is often considered less volatile than the FTSE 250.
However, by consisting exclusively of large enterprises, the index is also not known for its growth, making it generate historically lower returns. Although, as a substitute, the index does provide a higher dividend yield of 4.1% versus the FTSE 250’s 3.5%.
A third but often forgotten index is the FTSE 350, which combines the FTSE 100 and FTSE 250 indexes.
How to buy FTSE 250 shares
Like all stock market indexes, it’s impossible to buy shares in the FTSE 250 index itself. Instead, investors seeking to replicate its performance can either choose to invest in each of the 250 stocks individually, buy shares in an index tracker fund, or buy shares in an exchange-traded fund.
The latter two options are typically a more cost-effective approach. While it’s true that investing in a fund comes with management fees, most index trackers are run by computers rather than dedicated investment managers. As such, the fees are meagre and, to many, negligible.
Taking this approach allows investors to buy a small piece of every company in the index within a single transaction, significantly reducing trading fees versus buying each stock individually.
Some of the most popular FTSE 250 index funds are:
- Vanguard FTSE 250 UCITS ETF (LSE:VMID)
- Invesco FTSE 250 UCTIS ETF (LSE:S250)
- HSBC FTSE 250 UCITS ETF (LSE:HMCX)
Having said that, buying FTSE 250 stocks individually does allow investors to exclude certain companies from their portfolio – something that isn’t possible through a fund.
Both methods are a valid way of matching the index’s performance. However, deciding which approach is the most suitable ultimately depends on personal preference and circumstances.
Is the FTSE 250 a good investment?
As a highly diversified index of growing enterprises, the FTSE 250 has proven to be a lucrative investment in the past.
Between 2010 and 2021, the index delivered a total annualised shareholder return of 11.3%. By comparison, the FTSE 100 over the same period only generated an average annualised return of 7.3%.
This means £1,000 invested at the start of 2010 into a low-cost FTSE 250 index tracker would be worth £3,445.90 at the end of 2021 – a 245% return. In contrast, the same investment in an FTSE 100 fund would only be worth £2,226.80 – a 122% return.
Does this mean the FTSE 250 is the better investment? Not necessarily. Because the index contains smaller companies, it’s far more susceptible to volatility. This introduces additional risks that investors need to consider.
The performance of the indexes in 2022 demonstrates this volatility risk perfectly. The FTSE 250 fell by over 30% throughout the year, whereas the FTSE 100 only dropped by around 8%.
Providing it can continue delivering its historical performance into the future, the FTSE 250 could be an excellent long-term investment. However, it may not be suitable for an investor with a low risk tolerance.