Investing in index tracker funds can be a very sensible long-term strategy. And those who have followed the FTSE 250 in recent years will have done a fair bit better than their FTSE 100-chasing counterparts.
Over the five years to June this year, the mid-cap index has soundly beaten its larger sibling, recording a gain of 40%, compared to just 17% for London’s biggest.
And over 10 years, the outperformance looks even more remarkable, with the FTSE 100’s 43% gain being trounced by the FTSE 250’s 135%.
That doesn’t paint the full picture, as FTSE 100 blue chips typically pay better dividends than smaller companies. But even with that, the FTSE 250 has still come out on top with annual returns of around 11% over the decade, compared to 7% for the FTSE 100.
Smaller is better?
This might be exactly what we should expect, in line with one of small-cap investor Jim Slater’s favourite sayings that “elephants don’t gallop.” After all, smaller companies in their early days have far more scope to, say, double their earnings and their market-cap than the giants of the FTSE 100.
But there are more factors to it than that and, in the early years of the 21st century (perhaps with the dot com boom and bust still fresh in people’s memories), the trend among fund mangers did seem to favour safer FTSE 100 companies. I guess that way, at least, they were a lot less likely to be seen holding short-term losers at their quarterly updates and rebalancing.
That surely helped push P/E valuations for the FTSE 100 further ahead of the 250, and I reckon some of the past decade of mid-cap outperformance has been down to correcting that valuation imbalance.
About to change?
Since the middle of June, the fortunes of the two indices might just have started to change. The FTSE 100 is down by 9.5% since then, as a slow sell-off has turned into a bit of a rout over the past few weeks. But the FTSE 250 has dropped further, with a 13% fall.
The fear of a bad Brexit must be part of it, as the FTSE 250 mid-caps are more UK-focused overall, while the big guns of the FTSE 100 are mainly big internationals and less susceptible to what’s going on here at home. But there are growing global uncertainties too, and we’re probably seeing a bigger picture of a general “flight to safety” which does tend to happen when major investors get the economic jitters.
Does it matter?
But the big question for Foolish investors is what we should do about it? If you’re investing in a tracker fund with a long-term horizon, my suspicion is that the FTSE 250’s outperformance is likely to continue. Although if you’re closer to retirement and are looking for steady income, the FTSE 100’s more stable dividends might be what you want.
But for those of us investing in individual stocks, I really don’t think the index they’re in makes any real difference at all. For me, the only thing that matters when I consider an investment is the individual company itself — is it a great company, does it fit my investing criteria, and are the shares going for an attractive price today?
