Since the turn of the year, the FTSE 100 has been a major disappointment and has slumped by 8%. However, the FTSE 250 has increased in value by almost 4% year-to-date which, while not exactly stunning, is a full 12% better than its ‘big brother’ has managed in the same timeframe.
A reason for this is a lack of weighting towards the resources sector. While the FTSE 100 is dominated by mining companies and oil stocks which, together, make up 18.7% of the leading index, the FTSE 250’s exposure to those sectors is much smaller. In fact, oil and mining companies account for just 7.5% of the FTSE 250 index and, with the resources sector being akin to a bloodbath in recent months, a lower exposure has been of major benefit to investors in the mid-cap space.
Clearly, the resources rout will not last in perpetuity, but it does highlight that the two indexes are very different in their make-up. For example, the FTSE 100 is full of very globalised, diversified and mature businesses which may offer less growth potential than their smaller peers. This, of course, is not a criticism since larger companies are usually more defensive and resilient to downturns than their smaller counterparts but, for investors seeking a balance between growth and stability, mid-caps may provide the perfect mix.
That’s because the FTSE 250 offers an appealing growth outlook, with a number of its companies being niche players or operating within fast growing industries. However, they are less risky (in the main) than their small-cap peers and so could offer a relatively appealing risk/reward ratio. In other words, the FTSE 250 may offer the best of both worlds for long term investors.
Looking further back than the start of the year, it is clear that the FTSE 250 has been a superb place to invest. In the last ten years it has risen by an incredible 111% versus just 11% for the FTSE 100 and, while its fall during the credit crunch was more severe (the FTSE 250 lost 54% of its value in 2008/09 versus 47% for the FTSE 100), long term investors are unlikely to be overly concerned with short term losses.
Interestingly, no companies dominate the FTSE 250 index. For example, the largest five companies in the FTSE 100 make up 22.7% of its total value. However, in the FTSE 250, there is much more diversification, with the largest five companies making up just 6% of its total value. Certainly, company specific risk is very low in the FTSE 100 and a profit warning from a major constituent would not cause the index to collapse. However, it appears as though company specific risk is even lower in the FTSE 250, thereby improving its risk profile.
Of course, investing in the FTSE 100 and in small caps is a very worthwhile pursuit. The FTSE 250, though, appears to be the most enticing investment of the three. And, with a number of its companies being UK-focused and less globalised than their larger counterparts, they may deliver relatively strong earnings growth in the coming months as the UK economy continues to punch above its weight on the world stage.
Because of this and due to the FTSE 250’s historically superb performance, range of companies and greater diversification, it appears as though it is a great place to invest for the long term.