Few people expected the FTSE 250 to deliver the delicious returns it did last year. The London stock market’s second-most-prestigious share index rose 9% over the course of 2025.
With dividends included, investors in an index tracker fund on 1 January 2025 would have enjoyed a total return of 12.2%. With an average dividend yield of 3.2%, the FTSE 250 offered even better passive income potential than the FTSE 100, an incredible turn of events.
Impressive as that was, what really matters now to investors is what comes next. So the question is: can the index keep providing stunning shareholder profits?
Huge returns
Last year’s excellent total return comfortably exceeded the 8%-10% long-term range that stock markets typically deliver. If the FTSE 250 was able to repeat the trick over 25 years, someone investing £500 a month in an index tracker would eventually have £973,409 to show for it, give or take a few pence.
But be warned: last year’s returns were well above what investors have typically seen. Over a 10-year horizon, the index has delivered a far lower 5.5% annual return.
That’s less than half what the FTSE 250 achieved last year. If things revert to normal, a £500 investment here over 25 years would instead deliver a much lower £321,019. That’s not bad. But it’s unlikely to make most share investors feel ‘wealthy’.
A better strategy?
Past performance isn’t always a reliable guarantee of future returns, however. It’s possible 2025 represented a turning point as global investors piled into value shares. Yet despite last year’s gains, FTSE 250 shares still look dirt cheap to me, especially compared with US tech stocks. This could encourage further buying.
It could also move higher as the Bank of England cuts interest rates, giving the British economy a welcome boost. A large proportion of index companies’ earnings still come from these shores (roughly 50%).
But rather than buying an index tracker, I think a better wealth-building strategy could be to buy individual stocks. Softcat (LSE:SCT) is one such stock to consider that I think could be a far more lucrative option than a FTSE 250 tracker.
A FTSE 250 winner
I’ve actually put my money where my mouth is and bought Softcat shares for my own portfolio. Over the past decade, it’s provided an average annual return of 16.8%.
Okay, its share price has disappointed more recently as broader worries over the tech sector have grown. At £14.05, it’s dropped 8.2% in value over the last year. Problems like weak sales could emerge if British businesses keep the taps turned down on IT spending. Almost all revenues are generated from the UK.
But the long-term outlook here is rock solid, in my view. Companies need to digitalise to remain competitive, playing into Softcat’s hands. With expertise across IT segments including digital infrastructure, cybersecurity, networking and data storage, it has a wide range of growth possibilities over the next decade.
Today Softcat shares trade on a forward price-to-earnings (P/E) ratio of 19.5 times. That’s below the 10-year average of around 26 times, and could support a share price rebound sooner rather than later.
