In simple terms, the components of the FTSE 100 are the UK’s biggest listed companies by market capitalisation. And the FTSE 250 represents the next 250 by size. But beyond that, we can observe some other generalised differences.
The FTSE 100 is more weighted towards international companies, mainly because they tend to be bigger. And the FTSE 250 has a bigger weighting of UK-focused companies. There are obvious exceptions but, as I say, I’m just making some generalisations here.
FTSE 100 for stability
If you’re looking for safe dividend-paying stocks, then the FTSE 100 is mostly where you’ll find them. Again that’s due to size, as the most reliable dividends come from mature firms that are strongly cash generative. The FTSE 250, meanwhile, is traditionally considered a better target for growth investors. After all, companies that make it to the FTSE 100 tend to achieve it by growing through the ranks of the lower indexes.
Saying this, there have been some cracking growth stocks in the FTSE 100 over the years, and some great and dependable dividends paid by smaller companies. It’s a generalisation again, and you shouldn’t necessarily restrict yourself just because you’re either an income or a growth investor.
FTSE 250 volatility
One result of all this is that the FTSE 250 is generally more volatile than the FTSE 100. Over bullish phases, the smaller index tends to grow faster than its bigger sibling. But by the same token, a market crash can be harder on smaller indexes.
We can see that by looking at recent history. In the 10 years to the end of December 2019, the FTSE 100 rose by 41%. That’s a pretty poor decade, but we have been in all sorts of economic turmoil over that period. Still, the FTSE 250 climbed 135% over the same period.
The FTSE 100 might have provided better dividends as some sort of compensation, but there’s no denying the FTSE 250 was the winner over the decade. But what about the Covid-19 crash?
Between 19 February, just before the panic set in, and a month later, the FTSE 100 lost 30% of its value. That’s pretty horrendous. But in the same timescale, the FTSE 250 fell 41%. When the top index started to level out, the second rank one kept on going down.
FTSE 250 recovering stronger
As the stock market has started to recover, the FTSE 250 is moving quicker than the FTSE 100, confirming its greater volatility. Now, a few months is a very short term over which to compare these two investment measures.
But if we look back over five years, the two are remarkably close together. The FTSE 250 was well ahead coming into 2020, but at the low point of the lockdown they showed almost exactly the same five-year performance. Today, after a bit of upwards movement, the FTSE 100 is showing a five-year loss of 6% while the FTSE 250 is bang on breakeven.
Are we in for a strong stock market recovery in the next few years? Yes, I think so. I also think history suggests the FTSE 250 be the stronger performer. For those looking to buy index trackers, I know which one I’d go for, for sure.
Views expressed 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.