Yesterday’s stock market performance highlighted some nervousness among investors, partly caused by energy pricing. Whether or not it comes this October, I’ve been thinking about what any stock market crash could mean for my portfolio. Could it be a good time for me to look beyond the FTSE 100 index and buy more FTSE 250 shares, for example? Here’s my approach.
What are FTSE 250 shares?
FTSE indices are grouped by size. The FTSE 100 contains the largest 100 listed companies, subject to certain conditions. The FTSE 250 contains the next 250 companies by size.
So in theory, the FTSE 250 is more likely to contain up and coming companies, while the FTSE 100 index will have more established firms by virtue of their larger size. That’s not a perfect correlation, of course, but in broad terms, FTSE 100 companies are larger and therefore may have less immediate scope for growth. Indeed, that’s why some investors prefer FTSE 250 shares. They think there’s more chance of identifying an undervalued, growing company there than in the closely followed FTSE 100.
Over the past year, the FTSE 100 index has grown an impressive 19%. But the FTSE 250 index has comfortably outperformed it, adding 26%. Over the past five years, the contrast is even starker: while the FTSE 100 has grown less than 1% compared to five years ago, the FTSE 250 index has put on 25%.
A stock market crash and flight to size
What if there’s a stock market crash? Might the FTSE 250 outperform its big brother?
On one hand, the growth prospects in the FTSE 250 could look even more attractive if prices fall. On the other hand, sometimes a market crash leads to a flight to quality. While FTSE 100 companies aren’t necessarily higher quality, they are larger. In a stock market crash, big names like BHP or Barclays may seem less risky to some investors than FTSE 250 members such as XP Power or Moonpig. That perception might not be justified, but in a market crash, many investors often act on instinct, not on fact.
If that happens, it could open up a buying opportunity for my portfolio. If FTSE 250 shares are marked down as part of a wider market fall, I might add some to my portfolio.
2 FTSE 250 shares I’d consider
Specifically, two FTSE 250 shares I’d consider adding to my portfolio in a stock market crash are Big Yellow and Domino’s Pizza.
Big Yellow operates self storage facilities. I like the fairly predictable economics, often lengthy rental periods and pricing power of this industry. I also think there’s substantial untapped demand for self storage in the UK, so I see ample room for growth. Big Yellow’s distinctive branding could help it capture this. One risk is increased competition if more competitors enter the market, which could hurt profit margins.
Domino’s Pizza also has a strong brand which helps it build customer loyalty. Retrenching to its core UK market has helped its management focus and improved profitability. I see substantial room for growth at the company, which in its interim results reported system sales up 20% compared to the prior year period. But one risk is localised shutdowns due to the pandemic hurting sales.
