For many people, the FTSE 250 (INDEXFTSE:MCX) is seen as a relatively risky option when it comes to investing for retirement.
For starters, it lacks the income return of the FTSE 100, having only a dividend yield of 2.7% versus 3.9% for the main index. And with it being made up of mid-caps, which arguably have less global exposure and have reduced size and scale compared to their FTSE 100 counterparts, many investors may have overlooked the index.
However, the FTSE 250 could generate impressive returns for a variety of investors. Here’s why it could even be a better buy than the FTSE 100.
Over the last five years, a £1,000 investment in the FTSE 250 would have delivered a capital return of £460. That’s significantly higher than the £180 generated by the FTSE 100. In fact, in the last 20 years, the mid-cap index has generated capital growth of 267%. Since the large-cap index is up by 33% over the same time period, it is clear that even with an income return that is 120 basis points higher, the FTSE 100 does not seem to offer the same level of total return as its little sibling.
Certainly, the mid-cap index is more focused on the UK economy than its large-cap peer. As a result, many investors may argue that it faces a period of significant uncertainty, with Brexit having the potential to hurt the performance of the UK economy.
While this cannot be ruled out, the reality is that investors have had a considerable amount of time to factor-in the risks from Brexit. As a result, many UK-focused stocks already trade on low valuations which may offer wide margins of safety. And with talks between the UK and EU seemingly progressing in recent months, a ‘doomsday’ scenario may be unlikely. That’s especially the case since economic forecasts during the Brexit period have so far proved to be relatively inaccurate, with the UK economy holding up a bit better than many forecasters expected.
One area where the FTSE 250 lacks appeal versus the FTSE 100 is regarding volatility. Put simply, its price level is generally more volatile than its large-cap peer, and this can lead to larger paper losses. For investors who lack a long-term time period when investing, this could be a cause for concern.
However, even if an investor begins to buy units in a FTSE 250 tracker fund at age 60, they are still likely to have a significant amount of time before retirement. In many cases, people are working into their late 60s and beyond, and this could provide sufficient time for a drop in the index’s price level to be recovered. As such, and while the FTSE 100 continues to appeal, its junior sibling could prove to be the real star over the coming years.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.