The FTSE 100 and FTSE 250 indices together comprise the 350 largest companies listed on the London Stock Exchange (LSE). My stock market investment strategy involves a combination of active individual stock picking and passive index fund investing. I own units in exchange traded funds (ETFs) that track both the FTSE 100 and FTSE 250 as well as individual shares in FTSE 350 constituents.
So, what are the key differences between these index funds, and which do I prefer for 2022? Let’s explore.
Composition: large-cap vs mid-cap stocks
The primary difference between the FTSE indices is total market capitalisation. For the FTSE 100, this currently stands at £1.97trn, eclipsing the FTSE 250’s £379bn. FTSE 100 stocks are blue-chip and large-cap companies, such as BP and Lloyds. By contrast, the FTSE 250 contains mid-cap companies, including Cineworld and easyJet.
Mid-cap stocks tend to be more volatile than large-cap ones as some may be less dominant in their market sectors and they also may have higher growth potential. Conversely, when sentiment is bearish, investors often flock to defensive stocks with deeper cash reserves to weather a stock market crash. These companies feature more heavily in the FTSE 100.
Both indices weight by free-float market capitalisation of their individual constituents. Currently, Shell, AstraZeneca and HSBC are the three largest FTSE 100 companies, collectively comprising over 20% of the total index. The FTSE 250 is less top heavy. Its three largest shares comprise under 4% of the total index.
Sector focus and revenue sources
The FTSE 100 is highly concentrated in certain industry sectors, such as financial services, healthcare and energy. The FTSE 250 is more diversified in its industry focus. Additionally, roughly 70% of the revenue generated by FTSE 100 stocks comes from overseas, compared to 50% for the FTSE 250.
Accordingly, the FTSE 250 tends to be more closely linked to UK economic performance, whereas the FTSE 100 contains companies with a strong global presence. The FTSE 100 has historically had a correlation with sterling due to the falling cost of exports when the British currency weakens. The FTSE 250 is typically less exposed to movements in foreign exchange markets.
Historic performance and dividends
The FTSE 100’s value has been almost static over the past five years, eking out a positive return of just over 0.5%. The FTSE 250 has enjoyed stronger gains of 10.5%+. Indeed, the former last reached an all-time high in May 2018, compared to September 2021 for the latter.
However, this doesn’t tell the whole story. The FTSE 100 tends to have bigger dividend-payers among its constituents, and dividends form a crucial part of an investor’s total return. Current dividend yields sit at 3.22% and 2.17% for the FTSE 100 and FTSE 250, respectively.
Moreover, it has been a rocky start to the year for stock markets around the world, but the UK’s large-cap index has fared better so far compared to its mid-cap counterpart, declining by only 2.7% as opposed to 12.3%.
Why I prefer the FTSE 100 for 2022
For me, 2022 will be a year defined by tightening monetary policy, geopolitical uncertainty and stock market volatility. I’m looking to invest in resilient companies that can survive and even thrive in this turbulent macroeconomic environment. I believe the FTSE 100’s composition is better suited to perform well in the year ahead.
Therefore, while I will continue to hold my existing positions in tracker funds for both indices, I will only be adding to my position in my FTSE 100 ETF for now.
