Since its inception three-and-a-half decades ago, the FTSE 250 index has been a fantastic investment. Investors who bought the index at inception would have seen a 12% total annual return on their money. The question is, can this continue? Is the FTSE 250 your route to riches in future?
Route to riches?
The FTSE 100 is made up of the largest 100 companies listed on the London Stock Exchange. The FTSE 250, meanwhile, is made up of the 101st to 350th companies. The index that covers both the FTSE 100 and FTSE 250 is the FTSE 350. The next most extensive index is the FTSE All-Share. This is an index of the top 600 companies traded on the London Stock Exchange.
As a market-weighted stock index, the largest companies in the FTSE 250 have a disproportionate impact on performance. This tends to mean the most successful businesses float to the top while struggling companies sink to the bottom.
Moreover, unlike the FTSE 100, which is really an international index because more than 70% of its profits come from outside the UK, the FTSE 250 has a more domestic focus.
So the index’s performance is linked to that of the UK economy. This means the FTSE 250 is a bit more volatile than the FTSE 100. However, it’s essential to remember these are some of the fastest-growing companies in Britain. They tend to own world-class technology and international divisions.
For example, the two largest companies in the FTSE 250 right now are GVC Holdings and Intermediate Capital. These two have achieved earnings growth rates of 40% and 5% per annum respectively over the past six years.
The index’s substantial weighting towards growth stocks gives it a natural advantage. Trying to pick a market best-growth stock can be a tricky business. Even the professionals struggle to outperform the market consistently over the long term.
The FTSE 250 is continuously updating itself to include the fastest growing companies and exclude those businesses that are struggling. It’s similar to an active investment strategy, but it’s much cheaper and easier for investors to follow.
This is the main reason why the FTSE 250 has achieved such fantastic returns since its inception. No active manager is trying to second-guess the market. The index just selects the best stocks and then hold on to them until it no longer needs them.
Therefore, if you’re looking for one investment that could help you build a sizable nest egg, the FTSE 250 seems to tick all the boxes. While we don’t know what sort of returns the index will produce over the next two or three years, its focus on UK growth champions suggests that, over the long term, investors will continue to be well rewarded.
All in all, if you can take a longer-term view, and you’re willing to invest in growth stocks, the FTSE 250 could be your route to riches.
Rupert Hargreaves owns no share 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.