COMMENT
Britain's Worst Index

By Maynard Paton (TMFMayn)
December 14, 2004

The FTSE 100, the FTSE 250 or the FTSE Small-Cap: which is the worst index to track?

On an annual basis, the following table suggests that it could be the FTSE 250. Over the past nineteen years, both the FTSE 100 and Small-Cap indices have outperformed on eight separate occasions:

(*Year to date. Best index performance in bold. Figures account for reinvested dividends.)

However, extending the timeframe paints a different picture. The next two tables summarise the five- and ten-year performances of the three main London indices:

(*Year to date. Best index performance in bold. Figures account for reinvested dividends.)

Clearly, for longer-term investors, it's been a toss-up between the blue chips and mid-caps, with the latter winning out in recent years. Though what is really surprising is that, despite some stunning year-on-year achievements and a variety of general market conditions, history suggests smaller companies as a whole underachieve over time.

The reasons for this phenomenon are not exactly clear. Perhaps one explanation is the promotion process within the FTSE indices. The Small-Cap index currently contains 341 companies valued at between £14m and £334m, most of which are less established than those in the market's higher echelons.

The smaller companies that do succeed advance to the 250 and then the 100, which may give the upper market tiers greater ongoing contact with reliable performers that boast decent earnings potential. The small-cap index also collects the dross that falls out of the 100 and 250 indices, which may take longer to digest there before dropping further into the market's nether regions.

But whatever the reason, when they next roar into favour, it's certainly worth remembering what's happened to small-cap shares over the past two decades!

More: The Best Index To Track | Get your index tracker here.

Maynard owns FTSE 100 iShares and makes regular contributions to a FTSE 100 index tracker.