The FTSE 250‘s home to a wide range of promising businesses fighting to join the ranks of the FTSE 100. And as history’s demonstrated, small- and medium-sized enterprises have a habit of growing much faster than their large-cap counterparts.
With that in mind, it’s no surprise that since its inception the FTSE 250’s delivered close to an 11% annualised return compared to the FTSE 100’s 8%. So how has this collection of companies been doing lately? And just how much money have investors made in the last five years?
Surprising results
Usually, when stocks defy investor expectations, it’s considered a good thing. But not if the companies fall behind analyst targets. And lately, FTSE 250 stocks have sadly done the latter. In the last five years, the UK growth index has delivered a total return of 44.9%. That means anyone who put £100,000 to work in July 2020 is now sitting on £144,900.
That’s not bad, but on an annualised basis, it works out to just 7.7% — significantly behind its long-term average. What’s going on?
Smaller businesses have the advantage of being nimble. This allows them to shift and change strategy much faster than larger enterprises. But as a downside, they’re also far more sensitive to domestic economic conditions. And it’s no secret that the British economy hasn’t exactly been a beacon of growth lately.
Weak consumer purchasing power, due to inflation, has created an unwelcome headwind for many FTSE 250 stocks. And while conditions are steadily improving, the demand still pales in comparison to that from international markets – an area where most FTSE 100 firms operate.
Finding exceptions
While the index as a whole has underperformed, not all of its constituents have followed the trend. Take Plus500 (LSE:PLUS) as an example. The fintech enterprise provides a trading platform for retail investors to access the market. But unlike stalwarts such as Hargreaves Lansdown, it provides far more access across investing instruments (including the riskier ones) suitable for traders.
With three of the last five years delivering strong stock market gains, demand for its platform has increased both here in the UK and abroad. This, combined with financial product expansion and robust user growth, has resulted in higher deposits and more trading activity.
As such, revenues are ticking upward. And since the platform operates mostly with fixed costs, each additional user improves profit margins, which, on an underlying basis, now stand at 45%. And this has resulted in a staggering 153% return since July 2020, even before counting dividends, enough to turn £100,000 into £253,000.
Risk versus reward
At the heart of Plus500’s trading offerings are CFDs. These are exceptionally risky financial instruments that can easily obliterate a portfolio. But just like penny stocks, they can also deliver phenomenal gains, hence their popularity despite an estimated 80% of retail investors losing money.
These instruments work best when the markets are volatile. But during calm periods, trading activity slows, causing Plus500’s income to suffer, resulting in lumpy cash flows.
Is this a stock worth considering? The shares are too dependent on unpredictable market conditions, in my opinion. So this isn’t a business I’m interested in, especially since there are other promising and lower-risk opportunities to capitalise on in the FTSE 250 today.
