The FTSE 250 is often overlooked by many investors who are considering which shares to purchase within their Stocks and Shares ISA. Although the FTSE 100 could produce high returns in the long run, the FTSE 250 may offer a relatively favourable investment outlook.
The mid-cap index offers surprisingly strong income prospects, as well as greater international diversity than many investors realise. Since it currently appears to offer good value for money, now could be the right time to purchase a diverse range of FTSE 250 shares for the long term.
Income potential
While the FTSE 100’s dividend yield of 4.4% is higher than the FTSE 250’s yield of 3%, the mid-cap index could offer a sound income outlook. Around 20% of its members currently have dividend yields that are above the FTSE 100’s income return. This suggests that investors may be able to build a diverse portfolio of mid-cap income shares that has a combined yield of above 5%, or even 6%.
In many cases, FTSE 250 members offer strong dividend growth potential. Therefore, over the long run, they may be able to deliver impressive income returns that make the index a worthwhile place to invest for income-seekers.
International exposure
The FTSE 100 is often viewed as a global index, since two-thirds of its revenue is generated from outside the UK. While the FTSE 250 has greater exposure to the UK than the large-cap index, it still produces around half of its sales from international markets. Therefore, the FTSE 250 may offer greater international diversity than many investors realise.
At a time when the UK faces a period of political and economic uncertainty, the FTSE 250 may offer diversification benefits to investors. This could help to reduce their overall risk, as well as enable them to access the faster growth rates of emerging economies such as China and India.
Return prospects
The FTSE 100 may have recorded an impressive annualised total return of 9% since its inception in 1984, but the FTSE 250 has a stronger track record. Its total returns since inception in 1992 are around 11% per annum, which suggests that it offers greater long-term price appreciation potential than its larger peer.
This is perhaps unsurprising, since smaller businesses generally have greater scope to grow their earnings than larger companies that have more established positions in their respective markets. As such, the trend of the FTSE 250 outperforming the FTSE 100 could continue, which may make the mid-cap index more attractive to investors who have a long-term view.
Certainly, the outcome of Brexit negotiations could have an impact on the FTSE 250’s performance due to its exposure to the UK economy. But with many of the index’s members appearing to offer wide margins of safety at the present time, now could be the right time to buy a range of mid-cap stocks in a Stocks and Shares ISA.
