Here are two top stocks and an exchange-traded fund (ETF) I’d buy to target monster wealth if I had spare cash to invest.

The fund

The simplest way to get exposure to the mid-cap index is by investing in an ETF. With an ongoing charge of just 0.12%, the Invesco FTSE 250 UCITS ETF Acc‘s (LSE:S250) one of the cheapest ways to go about this.

As you’d expect, this vehicle closely mimics the performance of the FTSE 250. However, due to issues like fund fees, tracking errors, currency fluctuations, and the timing of dividend reinvestments, it’s delivered a slightly worse return than the broader index.

This is a common risk of investing in ETFs. However, an average annual return of 10.68% since its launch in 2009’s certainly good.

Owning a fund like this gives me exposure to hundreds of growth opportunities. It also allows me to effectively spread risk.

But as with any index, the FTSE 250’s packed with duds as well as stars, and so the bad performance of some stocks can mean I make worse returns than if I’d just bought certain individual shares.

The defence star

With this in mind, I’d might consider buying Babcock International (LSE:BAB) shares to aim for index-beating returns.

This is thanks in part to its cheapness versus other major UK defence sector shares. It trades on a forward price-to-earnings (P/E) ratio of 11.4 times. By comparison, BAE System, Rolls-Royce and Chemring trade on multiples of 19.4 times, 28.2 times and 19.9 times respectively.

Theoretically, Babcock’s cheapness today could make it a great contender for solid price gains over time, as the market recognises its value and re-rates its shares.

I’d also buy Babcock as it has an excellent chance to increase earnings (and its share price) as defence spending ratchets up. An 9% improvement in its contract backlog last year shows how the business is seizing this opportunity.

Fears of growing conflict in Europe, the Middle East and possibly elsewhere mean arms budgets should continue to grow. Remember though, Babcock’s profits growth could take a hit if supply chain issues in the defence industry persists.

The fantasy hero

Games Workshop‘s (LSE:GAW) another FTSE 250 stock I believe could deliver outstanding returns. As a shareholder and a keen hobbyist, I understand the enormous growth potential with this UK share.

The fantasy wargaming giant’s share price has rocketed 1,700% over the last decade, reflecting surging demand for its fantasy wargaming products. I don’t think it’s done yet either.

Lucrative markets in North America and Asia have much further to grow, and Games Workshop’s expanding its store estate to capture this opportunity.

Products like Warhammer 40,000 are seen as the gold standard in this fast-growing hobby. It means the business enjoys stunning profit margins — its gross margin grew to 69.4% in the 12 months to May. Their high desirability also means sales remain robust even during economic downturns.

Rising competition and increased counterfeiting represent a problem. But on balance, I believe Games Workshop remains a great stock to consider.

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How much would a £10,000 investment in one of these trackers a decade ago be worth now? Let’s look at some performance figures to find out.

Tracking the index

There are a number of different FTSE 250 trackers available today. But to keep things simple, I’m just going to look at the performance of the Invesco FTSE 250 UCITS ETF Acc (LSE: S250).

There are a few reasons I’ve chosen this particular fund. Firstly, it’s been around for over 10 years. Some other products, such as the Vanguard FTSE 250 UCITS ETF Accumulating fund, haven’t.

Secondly, this tracker is an ‘accumulation’ fund meaning its performance includes reinvested dividends. Over the long term, these can boost returns significantly.

Third, buying an ETF (exchange-traded fund) is typically more cost effective than investing in an index fund such as the HSBC FTSE 250 Index Accumulation fund as investors typically pays lower annual charges to their provider.

10-year performance

Now, 10 years ago, the Invesco FTSE 250 UCITS ETF Acc had a share price of 9,934p. As I write this (on 8 December) however, its share price is 15,188p.

Running a simple percentage gain calculation, the 10-year return is around 53% (or about 4.3% a year on an annualised basis).

This means a £10k investment a decade ago would now be worth about £15,300 (ignoring trading commissions and annual fees).

Return comparisons

Is that a good return? Well, it’s not terrible.

It’s most likely higher than I would have received from cash savings over that period (for most of the period savings accounts were paying less than 1% per year).

But if I’m honest, it’s not a brilliant return. Ultimately, I could have generated much higher returns elsewhere.

Here are some other approximate returns over the same period:

• iShares Core S&P 500 UCITS ETF USD (Acc) – 285%
• iShares Core MSCI World UCITS ETF USD (Acc) – 200%
• Fundsmith Equity – 300%
• Apple shares – 870%
• Tesla shares – 2,500%
• London Stock Exchange Group shares – 520%
• JD Sports Fashion shares – 1,150%

Diversification is smart

I think the takeaway here is that it’s really important to own a diversified investment portfolio.

FTSE 250 trackers can definitely play a role in a portfolio. In this index, there are some fantastic up-and-coming companies.

However, like any index, the FTSE 250 can underperform at times. So I wouldn’t want to have a huge allocation to it.

If I had half my portfolio in a FTSE 250 tracker and the index continued to deliver returns of just over 4% a year over the next decade, I could be looking at less money in retirement.

By taking a diversified approach to investing, and allocating capital to a range of different funds, as well as some individual stocks that have the potential to beat the market over the long run (The Motley Fool can be an excellent source of ideas here), investors might be able to generate much stronger returns.

The post If I’d put £10k into a FTSE 250 tracker 10 years ago, here’s what I’d have now appeared first on The Motley Fool UK.