Typically, the FTSE 250 has historically outperformed the FTSE 100 in a bull market. That’s not really surprising, due to the makeup of the two indexes. The FTSE 100 is home to many mature companies in the dividend-paying stage. But it offers less in the way of growth.
The FTSE 250, by contrast, contains a lot of smaller growth companies. As a result, it tends to be more volatile. And it tends to fall faster than the FTSE 100 when the stock market is weak. But I think I’m seeing signs that our mid-cap index could be set for a new bull run.
Over the past decade, the FTSE 250 has beaten the FTSE 100 seven years out of 10. That’s in terms of total returns, so it allows for the FTSE 100’s bigger dividend yield too. It is, though, a relatively short period over which to try to extract anything statistically meaningful.
Better returns
But there is one other clear difference. In years when the stock market has been climbing, the FTSE 250 has beaten the FTSE 100 more often.
Over the 10-year period, total market returns were positive eight times. And of those eight bullish years, the FTSE 250 came out ahead six times. The FTSE 100 ended on top just twice.
In 2019 for example, the FTSE 250’s total return came in around 60% ahead of the FTSE 100. But it must have crashed further when the Covid-19 pandemic struck the next year, surely?
Pandemic response
The full-year picture is rather remarkable. The FTSE 250 did indeed crash more heavily in the early days of the crisis. But it recovered far more quickly too. By the end of 2020, the mid-cap index showed an overall drop of only 4%. Its bigger sibling fell 15% over the full year.
That probably ties in with most investors’ feelings about the two indexes, I suspect. I expect better performance during bull markets from the FTSE 250, but with greater volatility during ups and downs.
History has given us more bull markets than bear markets, and the bull markets have lasted considerably longer. So I’d be more tempted to invest in a FTSE 250 tracker than a FTSE 100 tracker.
Buying shares
But when buying shares in individual companies, I think it would be a mistake to give any weight to the index. No, the measure of a stock is down to the underlying performance of the company and the value I can buy the shares at. It makes no difference whatsoever to this year’s earnings and dividends which index a company is arbitrarily placed in.
But back to the original question, is the FTSE 250 set for a new bull market? Right now, I am optimistic about the next 10 years on the stock market. And if that optimism proves well-placed, I do think the FTSE 250 has a strong chance of coming out ahead of the FTSE 100.
