The FTSE 250 often plays second fiddle to its more prestigious sibling, the FTSE 100. However, I think that the outlook for the smaller index looks promising for 2022.
The UK’s strong economic outlook
There are reasons to be optimistic for companies doing business in the UK. First, Boris Johnson has just announced the removal of all outstanding Covid restrictions as part of a “living with Covid plan”. This has been greeted with a positive reaction from the hospitality industry and airlines, and is likely to give our economy a boost.
Second, according to a recent report by the International Monetary Fund, the UK’s economy will expand by 4.7% in 2022. This is one of the largest annual increases among the G7 developed nations.
Focussing on the FTSE 250
I think that the index has some good companies in sectors such as travel, leisure, and retail that could make the most of the post-Covid economic recovery over the next few years. Also, whereas some FTSE 100 companies derive a lot of their earnings from outside the UK, a majority of FTSE 250 companies are more reliant on domestic economic conditions. For these two reasons, I see some significant upside potential from the stocks in the index.
Although I could pick individual shares, for my own portfolio, I think the best way of investing is with a FTSE 250 exchange-traded fund (ETF). This allows me to own all the companies in the index by holding just one share.
I’m looking at Vanguard FTSE 250 UCTIS ETF (LSE: VMID) which is a large fund, with almost £3bn in assets under management. It’s well established (around eight years old) and has a low management fee of 0.11%. This fund has both an accumulation and a dividend-paying option. Personally, I like the income stream option and the current yield is 2.55%.
Performance
At first glance, the share price performance of the ETF seems underwhelming. Over the last 12 months, it’s about flat and year-to-date down around 13%. However, most of the decline has been since January and 2022 has been a turbulent time for much of the stock market so far. I prefer to look over a longer time horizon and over the last three years, the fund’s price is up almost 7%.
One of the problems with buying an index is that I can only earn the returns of the FTSE 250. It’s certainly possible that if I could pick the right shares, then I might be able to earn a bigger return. However, I’m comfortable settling for what might be a lower return for the benefit of having greater diversification by owning the index.
Of course, nothing is certain and rising inflation and interest rates could hurt some companies’ earnings. That said, I think that the FTSE 250 has stocks in it that can still perform well in 2022 and I’m seriously considering adding this FTSE 250 ETF to my holdings as part of a balanced portfolio.
