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Will The FTSE 250 Keep Beating The FTSE 100?

2015 has been a rather disappointing year for the FTSE 100. The UK’s leading index of shares has fallen by 3%, mainly as a result of a horrific year for the resources sector, as well as a slowdown in China which provided a major shock in August. Furthermore, there are also nagging concerns regarding the prospect of interest rate rises in the US and their impact on global growth.

Bearing this in mind, the performance of the FTSE 250 in 2015 may surprise many investors. That’s because it has risen by 6.5% since the turn of the year, thereby outperforming the FTSE 100 by almost 10%. This, though, is a mere continuation of a trend which has seen the junior index consistently beat its big brother in recent years. For example, the FTSE 250 has more than doubled in the last decade, while the FTSE 100 is up by a measly 15%.

A key reason for their differing performances is, of course, risk. In other words, the FTSE 250 carries more risk than the FTSE 100 and, as such, its returns are likely to be greater. The additional risk comes from the size of companies in the FTSE 250 which are smaller than in the FTSE 100, with smaller companies tending to be less diversified, less financially sound and less stable than their larger peers.

In addition, the FTSE 250 has a significantly lower proportion of its index made up of resources companies. For example, at the end of October resources companies constituted 7.01% of the FTSE 250 index, while for the FTSE 100 the figure was much higher at 18.15%. As mentioned, the resources sector has had an annus horibilis in 2015 and has pulled down the performance of the FTSE 100 to a greater degree than for the FTSE 250.

Looking ahead, it seems likely that the FTSE 250 will continue to beat its larger peer. Certainly, the advantage of having fewer resources companies may not be as great over the medium term since their prices are unlikely to continue falling at the same rate as has been the case in recent months. And, in the long run the FTSE 100 could even benefit from its large exposure to that sector, as it has the potential to recover in the coming years.

However, the FTSE 250’s bias towards smaller, faster growing stocks represents a huge advantage over its larger peer. While many of them will be more volatile than the very mature, well-diversified and relatively stable industry leaders found in the FTSE 100, they also offer greater innovation, are more nimble and usually grow at a faster rate over the long run.

Furthermore, the FTSE 250 is made up of 36.3% financial services companies and 22.4% industrials; many of which represent good value for money at the present time. Therefore, they could contribute to greater capital gains than the FTSE 100 which, although having exposure to those two sectors, has so on a much smaller scale. As such, and while the FTSE 100 is a highly appealing investment at the present time, the FTSE 250 looks set to continue to beat it in 2016 and beyond.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.