The FTSE 250 often takes a backseat to the FTSE 100’s popularity. Yet despite not being home to the largest companies on the London Stock Exchange, it contains a wide range of promising enterprises that often go overlooked.
Historically, this mid-cap index has actually outperformed its larger sibling. And not by a small margin. By housing smaller businesses, it benefitted from higher potential capital gains growth capacity. But even dividend-paying enterprises appear to be a robust source of passive income.
So, does that make it the better investment in 2024? Let’s take a closer look.
An explosive recovery?
With macroeconomic conditions steadily improving, the stock market as a whole has been on an upward trajectory since last October. Looking specifically at the FTSE 250, shares have jumped by around 14% so far, not to mention the extra gains from dividends over the period as well.
By comparison, the FTSE 100 has delivered only around half of these gains. Moreover, with more businesses emerging from the struggles caused by interest rate uncertainty, this upward trajectory could be set to continue. If that’s the case, then snapping up shares in an index fund or better individual top-notch stocks could be immensely rewarding in the long run.
Unfortunately, this is where things get a bit more complicated.
Don’t forget about volatility
Smaller companies have more room for growth. However, that also comes paired with a higher chance of failure. With fewer resources to hand, these businesses are more exposed to risks that larger firms can simply ignore due to their deep pockets.
A quick glance at the FTSE 250’s track record perfectly demonstrates this. While it’s true the index has historically outperformed the FTSE 100, this hasn’t been a straight line. Volatility among small- and mid-cap companies is significantly higher. In fact, even with the recent comeback, the index is still down 18.4% since the start of the 2022 correction. The FTSE 100, on the other hand, is actually up.
Holding through this volatility has proven to be rewarding for patient investors. But not everyone has the temperament or financial position to do this. Investors nearing retirement may find such volatility incompatible with their financial goals. Or someone might simply not have the stomach to watch their portfolio drop by double-digits.
To buy or not to buy?
As with anything in the stock market, what makes an investment decision good or bad can be highly dependent on the individual. Personally, I’m not bothered by short-term fluctuations in stock prices. As such, the FTSE 250 looks like an attractive hunting ground for buying opportunities for growth and income stocks. But for those who prefer stability, exploring indexes like the FTSE 100 with more mature companies might be the better move.
