Is the FTSE 250 set to surge ahead of the FTSE 100?

The FTSE 250 has stormed ahead of the FTSE 100 over the past decade. Does the pandemic slump give me a new chance to buy smaller stocks?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When it comes to stock market bull runs, the FTSE 250 has often outrun the FTSE 100. And sometimes it can be quite spectacular. Why is that, and does it make sense for me to focus on the smaller index now that we’re heading out of the pandemic slump?

Well, firstly, the FTSE 250 is home to a lot of smaller companies. And it tends to house more shares with growth potential. After all, many of the giants of the FTSE 100 have have reached maturity and stopped growing. And they’re now in a (hopefully) long period of throwing off dividend cash.

Smaller firms grow, and many keep on going until they’re big enough to enter the top index. So it’s perhaps not surprising that the mid-cap FTSE 250 index shows stronger growth, while the FTSE 100 is favoured by income investors. But at the same time, companies drop out of the larger index and fall back into the smaller one, and that must surely offset the growth advantage to some extent. Let’s look at how the two indexes have performed over the past few years.

In the 10 years up to the middle of February 2020, the FTSE 250 soared by 132% compared to just 38% for the FTSE 100. Superior dividends would have added to the latter’s overall result, but I reckon that’s still an impressive outperformance.

Resilient performance

When the 2020 stock market crash hit, the mid-cap index fell harder than its bigger sibling. We did see something of a recovery in the latter part of 2021. But 2022 fears seem to have headed off the 250’s resurgence. Since mid-February 2020, we’re looking at an overall 7% decline for the FTSE 250, while the FTSE 100 is almost bang on zero overall change.

So the smaller index has suffered a bit more during hard times, but really not by much. And that has surprised me. I’ve long been aware of the FTSE 250’s relative strength during upbeat times. But I had expected to see considerably more pain when the next market fall came along. The FTSE 250, then, seems to be more resilient than I thought — judging by the recent crash, at least.

So is my portfolio allocation poor, and could it be improved? I think it could be. On current valuations, my stock market investments (ISA and SIPP) are 49% weighted to the FTSE 100. Only 24% of my invested cash is in the FTSE 250, and the remaining 27% is elsewhere.

Buy more FTSE 250 shares?

I rarely think about such allocation, preferring to focus on individual shares that I like regardless of what index they’re in. And I do still have a few FTSE 100 companies on the list of stocks I’d like to buy. But what FTSE 250 shares are there out there that might help balance my investments better, and that I like the look of on their own merits?

Howden Joinery (LSE: HWDN) is one. I missed the soaring shares during lockdown. But the price has gone off the boil a bit in 2022. I would consider buying on further weakness. And despite the risks, I really am tempted to put a small amount into the very volatile cybersecurity specialist Darktrace (LSE: DARK).

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

UK money in a Jar on a background
Investing Articles

With a 10.1% yield, should I buy this FTSE 250 income stock?

Our writer looks at an income stock that’s kept its dividend unchanged for five years. But is it high enough…

Read more »

Investing Articles

Up 23% in a month, can this FTSE 100 stock continue to soar?

Airtel Africa's recently been the FTSE 100’s top-performing stock. With huge opportunities for growth ahead, is it set to continue?

Read more »

Investing Articles

£20,000 in savings? Here’s how an investor could use it to target an eventual £980 of passive income each month

Our writer demonstrates how an investor could aim to earn close to £1,000 each month in passive income from a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

£10,000 invested in the S&P 500 at the start of 2025 is now worth…

Since the start of the year, the S&P 500's underperformed the FTSE 100. And Stephen Wright thinks investing in the…

Read more »

Investing Articles

Is this a turning point for the Diageo share price?

The Diageo share price is at an eight-year low. Is this FTSE 100 favourite simply too cheap to ignore? Roland…

Read more »

Investing Articles

As the FTSE 100 hits record highs, should I sell my shares and buy an index fund?

Our writer’s portfolio lagged the FTSE 100 last year, but he’s not giving up on stock-picking and highlights a recent…

Read more »

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

£10,000 invested in Lloyds shares 6 months ago is now worth…

Lloyds shares have performed well over 12 months but have broadly disappointed investors over the long run. Dr James Fox…

Read more »

Investing Articles

£20,000 in savings? Here’s how investors can aim for a £4,000 monthly second income

Millions of investors use the Stocks and Shares ISA as a vehicle to build wealth and generate a second income.…

Read more »