It’s nice to see the FTSE 100 hit record highs recently. But I’m not too impressed myself. Why so? Because I am aware the FTSE 250 has outperformed the FTSE 100 for seven out of the last 10 years. It is quite the winning record. In fact, no blue-chip stock market has outperformed the UK’s mid-cap index since the turn of the century.
How has FTSE 250 outperformed FTSE 100?
The global market of the past decade hasn’t been the most favourable to the make-up of the FTSE 100. The index is biased towards global, cyclical businesses, namely mining, financial services, and pharmaceutical companies.
Conversely, I attribute the stock market successes of the past decade mainly to internet and technology stocks, which have led during that time. The FTSE 250, as well as the S&P 500, hold more of these stocks. Needless to say, both indexes have outperformed the FTSE 100 since the turn of the century.
Unique appeal of FTSE 250
The biggest appeal for me of the FTSE 250 is its lower cyclical bias than the FTSE 100.
As a young investor, I believe the FTSE 250 is where growth trends are more concentrated. It is something that the FTSE 100 is not renowned for.
The risk for me in increasing my backing for FTSE 250 companies is that the index tends to be more representative of the domestic economic background. I think the domestic outlook is a mixed picture to say the least. Meanwhile, the FTSE 250 index, being made up of 35% financial companies and 21% consumer discretionary companies, is not the most diverse.
In addition to those two hazard signs, I view the index as being higher risk than the FTSE 100, which holds the bigger, more valuable names.
The most suitable index for my long-term approach
Despite the FTSE 250 historically outperforming the FTSE 100, performance alone cannot be a reason why I back this index more than the FTSE 100. It also comes down to my particular investment objectives.
Personally, it is a question between income and growth. If I want to receive a regular and reliable income from my investments, the FTSE 100 is more appealing. Conversely, if I’m more interested in generating capital growth, the FTSE 250 is a better choice.
At this stage of my investing journey, I require both. I see the FTSE 100 as a safer bet for me because it’s got the most valuable, widely held stocks. If I can identify and back more winners than losers, I should still be able to generate good investment returns. This is my strategic approach.
However, holding FTSE 250 shares is just as important to my investment objectives. The index has historically had slightly better growth – so as a tactical long-term investment, it is important I unearth companies with the most serious growth potential. This way I’m exposed to the steady performance of the FTSE 100, as well as any supernormal performance that the FTSE 250 can provide.
It is not a choice between one or the other. Investing in both stock markets — and the S&P 500 — will provide me with a wider universe of companies from which to generate diverse investment returns.
