The Motley Fool

Forget cash ISAs! The real action will be on the FTSE 250 in 2019

Savers put far too much trust in cash ISAs, given that they currently pay an average variable rate of just 0.86% a year. Even if you lock away your money for five years you get just 1.94% on average, according to Savings Champion.

Superior returns

You can currently get far better yields from investing in stocks and shares. For example, the FTSE 100 is forecast to yield 4.9% in 2019. That is the first index most private investors look to follow when choosing tracker funds or exchange traded funds (ETFs), which means they often overlook the FTSE 250 as a result. This could be a mistake, especially over the next year.

As its name suggests, the FTSE 250 follows on from the FTSE 100, covering the 250 next biggest London-listed stocks. Both have endured rotten years, the FTSE 100 falling 8.76% and the FTSE 250 doing worse, down 13.43%.

Brexit decision time

This has been a bad year for stock markets everywhere, so don’t let that put you off buying either index. In fact, it should encourage you, as you are getting them at a discount. There is still an outside chance that the FTSE 100 could hit 8,000 this coming year, but it could be overshadowed by a resurgent FTSE 250.

As with almost everything in the UK, it all comes down to Brexit. The FTSE 100 has a complicated relationship with our departure from the EU – it surprised many by flying after the 2016 referendum because companies on the index earn three-quarters of their revenues overseas, which were worth more as the pound slumped.

Domestic troubles

The FTSE 250 has a far greater domestic focus and this means that Brexit uncertainty has hit it harder, and continues to do so. If we get a no-deal Brexit and it turns out to be as horrible as Remainers suggest, domestic stocks listed on the FTSE 250 could take a whacking, whereas blue-chips could actually benefit. The reverse could happen if things go relatively smoothly.

If the UK avoids meltdown in the crucial weeks ahead, domestic sentiment could fly to the stars. Some analysts claim domestic-focused UK stocks are undervalued by as much as 30%, and are due a massive re-rating. If this is the case, the FTSE 250 could be the best way to play it.

Roll the dice

Naturally, it’s a risk. The UK is a binary play right now. However, markets are cautiously betting on a positive outcome, as shown by the pound’s recovery in recent weeks, as traders calculate Parliament won’t vote for no deal. Buying the FTSE 250 is therefore a risk, as investing always is.

Both indices have underwhelmed over the last five years, the FTSE 100 up a mere 2% in that time and the FTSE 250 up just 4%. Currently, they yield 4.42% and 3% respectively, so at least there is some dividend income as compensation.

You can track both indices easily and cheaply using exchange traded funds such as the iShares FTSE 100 UCITS ETF (ISF) or the iShares FTSE 250 UCITS ETF (MIDD), which have annual charges of just 0.07% and 0.4% respectively. I’d pick either of them over a cash ISA.

Five Income Stocks For Retirement

Our top analysts have highlighted five shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it right away!

harveyj holds the iShares FTSE 100 but has no other 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.