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Which are better buys – FTSE 100 or FTSE 250 stocks?

Screen of various price trends, possibly in FTSE 100
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September is not turning out to be a good month for the FTSE 100 index. It is down by 0.5% on average compared to August. If the trend continues through the rest of the month, it will only be the third month in 2021 so far when the index value has declined from the month before. The index has risen in the other six months, even as much at 3%, like in April. 

By comparison, the FTSE 250 index has fared better. So far, it has shown a 1.3% increase this month. And if this continues, it will maintain the trend seen all through 2021, save June, when it dropped by 0.3%. Clearly, it looks like the FTSE 250 index is better placed than FTSE 100. 

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Why has the FTSE 250 outperformed the FTSE 100 index?

I reckon that this is at least in part because the FTSE 250 stocks are more likely to be UK-centric. These include the likes of UK-focused property stocks Bellway and Derwent London, which are both among the top 20 index constituents by market capitalisation. Since the UK has seen speedy vaccinations in the past months and its growth numbers have also improved, it follows that investors are optimistic about FTSE 250 stocks’ prospects. 

By comparison, FTSE 100 stocks tend to be big multinationals that may have been subject to greater uncertainty in the recent past because of global developments. For instance, banking corporation HSBC’s share price has been sensitive to geopolitical stresses between the US and China on the one hand and China and Hong Kong on the other. Similarly, global oil stocks like BP hinge on the commodity’s price and production changes. And the likes of consumer goods giant Unilever have been in an uncertain place because of uneven recovery in consumer markets. 

Best of both the worlds

But what if a stock could combine the best of both worlds? There are at least some FTSE 100 stocks that come with the benefit of having a large market capitalisation and that are also UK-focused. British utilities, real estate stocks, and supermarkets are examples of three such segments. 

What I’d do now

However, I will refrain from just basing my investment decisions based solely on the index that stocks belong to. One reason is that there are plenty of FTSE 100 multinationals that have performed well this year and could make great long-term investments. An example from my own portfolio is AstraZeneca. 

Another is that the latest macro numbers for the UK do not look good, something I have explored in greater detail in another article today. It appears that these figures may be temporary, but if the trend continues, they could impact FTSE 250 stocks significantly.  

All in all, though, as a top-down investor, I find starting from the big picture helpful in developing my investing strategies. And it clearly suggests that I can find some high-performing stocks among FTSE 250 constituents for my portfolio.

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Manika Premsingh owns shares of AstraZeneca and BP. The Motley Fool UK has recommended HSBC Holdings and Unilever. 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.

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