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The general election has pushed the FTSE 250 to record highs! Should you buy the shares in 2020?

2019 will likely go down in British history as the height of political uncertainty in recent decades. Yet year-to-date, the FTSE 100 and the FTSE 250 indices are up about 15% and 23% respectively. 

Many investors are now wondering if both indices can continue to perform strongly in 2020. Today, I’d like to discuss the FTSE 250 index, which recently hit an all-time at 21,935.33, as well as several shares from the index that may deserve investors’ attention.

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While past performance may not exactly repeated in the months ahead, the FTSE 250’s track record highlights its growth potential. It is home to many well-managed companies that have robust earnings. Let’s take a closer look.

FTSE 250 vs FTSE 100

The FTSE 250 index was launched on 12 October 1992. Companies in it usually have a more domestic focus so they are more directly affected by shorter-term developments in the economy and consumer sentiment.

Therefore, I regard it as a better barometer of the UK economy than the FTSE 100 where most companies are multinational conglomerates.

Since around 50% of the FTSE 250’s income is derived from the UK, the result of the general election and developments around Brexit clearly matter to its more immediate performance.  

How about the pound and the FTSE 250?

The effects of exchange rate movements tend to be not fully clear-cut for the companies in the FTSE 250 index, mostly due to their domestic focus.

Many of our readers will remember that following the referendum on leaving the EU in June 2016, the pound dropped sharply against other major international currencies. On 22 June 2016, the pound was about 1.30 to the euro. In November 2016, it was about 1.16. Currently, it trades around 1.1750.

It is only in recent weeks that the pound has gained ground, yet the FTSE 250 has been up since the Brexit referendum. Following the Brexit result, it was around 17,400. On 20 December 2019, it closed at 21,674.20.

In terms of the compound annual growth rate (CAGR), this change in the value of the index in about three-and-a-half years equates to 6.5%.

Thus £1,000 invested in a FTSE 250 tracker after the Brexit referendum would have now become about £1,270. And this return does not take into consideration any dividends received or the reinvestment of that income.

If you like dividend income, you are spoilt for choice among FTSE 250 businesses. The average yield of the index is about 2.8%.

What I’m watching in the FTSE 250

In the New Year, there are several FTSE 250 companies I’d consider for a long-term diversified portfolio. They include:

  • Bellway, housebuilder and developer – dividend yield of 4.0%
  • Britvic, producer of branded soft drinks – dividend yield of 3.4%
  • FDM Group, supplier of IT consultants, called Mounties – dividend yield of 2.9%
  • Greencoat UK Wind, infrastructure fund focusing on renewable energy – dividend yield of 4.6%
  • Greggs, popular bakery – dividend yield of 1.6%
  • Inchcape, global car seller and distributor – dividend yield of 3.8%
  • Group, price comparison websites – dividend yield of 3.4%
  • PageGroup, recruitment group – dividend yield of 2.6%
  • Safestore Holdings, self-storage specialist – dividend yield of 2.1%
  • Tate & Lyle, food ingredients manufacturer and supplier – dividend yield of 3.9%

In addition to domestic companies, there are many investment trusts, such as Alliance TrustMonks Investment Trust, Murray International Trust and Templeton Emerging Markets Investment Trust, listed in the FTSE 250. And these trusts have a broad combined influence on the direction of the index.

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tezcang has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. The Motley Fool UK has recommended Greencoat UK Wind and 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.