The Motley Fool

Why I think avoiding the FTSE 250 could be a major mistake

With the Brexit process creating a significant amount of uncertainty, many investors may feel avoiding the FTSE 250 is a sound move. After all, the index generates the majority of its income from the UK, and could therefore be impacted by the uncertainty facing the country than the more internationally-focused FTSE 100.

While that may, or may not, be a shrewd move in the short run, since ultimately nobody knows how the Brexit process will play out, in the long run it could be a major mistake. The FTSE 250 could offer significant growth potential, and appears to offer good value for money at present.

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Growth prospects

While large-cap shares generally offer lower risks than their smaller counterparts, mid-cap stocks have historically posted significantly higher returns. For example, over the last decade, the FTSE 100 has recorded a total annualised return of around 11%. While that’s an impressive rate of growth during what has been a bull market, the FTSE 250 has delivered an annualised total return of around 15% during the same time period.

This difference in returns isn’t a major surprise. Mid-cap shares generally offer greater scope to expand, and are often less mature than their larger counterparts. Therefore, buying them for the long run can mean an investor accesses a higher rate of growth.

Value

With the FTSE 250 currently having a dividend yield of around 3.1%, it seems to offer good value for money. Certainly, the prospects for the UK economy are currently difficult to accurately predict. There are doubts about when Brexit will take place, whether there will be a deal, and there’s even a chance that the UK will remain in the EU. The impact of all of those various possibilities is a known unknown which could lead to volatility for the index.

However, those risks appear to be priced in. A wide range of FTSE 250 shares seem to offer margins of safety, which indicates investors have factored in the potential risks. As such, now could be a good time for long-term value investors to buy a number of stocks that may deliver impressive growth rates in the long run.

Recovery potential

While the FTSE 250 is currently trading below its all-time high, it has a solid history of recovering from challenging periods. After the dot com bubble and the financial crisis, it’s been able to deliver higher highs in the intervening years. While Brexit’s full impact is as yet unknown, the UK economy has faced major challenges in the past and gone on to perform well. This has been reflected in a high rate of growth for the mid-cap index.

As such, while potentially riskier than the FTSE 100 in the short run, the FTSE 250 could offer higher long-term returns. While avoiding it may seem like a shrewd move in the coming weeks, over the coming years it may prove to have been a major mistake.

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