Once again, the FTSE 250 has trounced the FTSE 100.
Have you got a FTSE 100 index tracker or ETF in your portfolio? If so, you have my sympathies.
Why? Because your stake in Britain's stodgiest companies -- and companies, what's more, that are heavily skewed towards sectors such as oil, financials, and mining -- has once again been trounced by nimbler businesses.
The figures speak for themselves. A year ago yesterday, the FTSE 100 closed at 4,547. Last night, it closed at 5,314 -- a climb of 17%, reflecting a year's worth of better economic news, and the easing of the credit crunch.
But the FTSE 250 has turned in a much better performance. Comprising the 250 companies below the top 100, it's delivered a 30% return over the same period. Standing at 7,763 a year ago, the FTSE 250 index closed at 10,074 last night.
In short, the return from the FTSE 250 has outperformed the return from FTSE 100 by a whopping 75%. And it's outperformed by FTSE All-Share by almost exactly the same amount, because a large chunk of the All-Share is made up of the FTSE 100.
Fast track
I wrote about the FTSE 250's sparkling performance just over a year ago, pointing out how it had previously outshone the FTSE 100 and FTSE All-Share.
From the low point of the previous downturn in March 2003, the FTSE All‑Share and FTSE 100 had climbed 118% and 105% respectively by the market's peak in June 2007. Yet the FTSE 250 had soared by a much more impressive figure -- a whopping 221%, more than twice the growth achieved by the FTSE 100, and almost twice the performance of the FTSE All‑Share.
And in short, from the way things are going, it looks set to turn in the same level of out-performance again.
Elephants don't gallop
Why does this happen? The simplest explanation is summed up in that well-known phrase from investment guru Jim Slater, first articulated in The Zulu Principle: "elephants don't gallop".
And the FTSE 100, for the most part, are lumbering elephants. HSBC (LSE: HSBA), BP (LSE: BP), GlaxoSmithKline (LSE: GSK), Unilever (LSE: ULVR) -- these are giant businesses, supertankers of the financial world.
Income and safety
That doesn't mean to say, of course, that one shouldn't invest in these elephants. Most of my own direct shareholdings are FTSE 100 companies, for two reasons.
First, resilience: the odd exception apart -- Royal Bank of Scotland (LSE: RBS), for instance -- FTSE 100 companies don't implode. FTSE 250 businesses do so far more frequently, as we saw this week.
And second, FTSE 100 companies throw off a decent dividend stream. As of last night, for instance, the FTSE 100 was yielding 3.4%, compared to the FTSE 250's 2.6%. That's an income 30% higher, enough to tip the balance for income investors wanting dividends today, rather than growth tomorrow.
Taking a stake
I hold both FTSE 250 and FTSE All-Share index trackers -- a reasonable enough strategy, I think. I don't hold a FTSE 100 tracker at all.
But going forward, I plan on altering the mix between the two, switching more funds out of the FTSE All-Share, and into the FTSE 250.
Fancy a dabble? Not every index tracker provider or fund platform offers a FTSE 250 tracker, so you may be out of luck with your chosen provider or platform.
But the FTSE 250 is handily available through an ETF such as the HSBC FTSE 250 ETF (LSE: HMCX) or iShares FTSE 250 (LSE: MIDD), which can be bought through your regular broker. Lyxor and db x-trackers also offer FTSE 250 ETFs.
More from Malcolm Wheatley:
Malcolm holds shares in BP and GlaxoSmithKline, and -- as noted -- also holds FTSE All-Share and FTSE 250 index trackers from HSBC and Vanguard. His delightful wife Mandy holds a Legal & General FTSE All-Share tracker.
