When it comes to stock market bull runs, the FTSE 250 has often outrun the FTSE 100. And sometimes it can be quite spectacular. Why is that, and does it make sense for me to focus on the smaller index now that we’re heading out of the pandemic slump?
Well, firstly, the FTSE 250 is home to a lot of smaller companies. And it tends to house more shares with growth potential. After all, many of the giants of the FTSE 100 have have reached maturity and stopped growing. And they’re now in a (hopefully) long period of throwing off dividend cash.
Smaller firms grow, and many keep on going until they’re big enough to enter the top index. So it’s perhaps not surprising that the mid-cap FTSE 250 index shows stronger growth, while the FTSE 100 is favoured by income investors. But at the same time, companies drop out of the larger index and fall back into the smaller one, and that must surely offset the growth advantage to some extent. Let’s look at how the two indexes have performed over the past few years.
In the 10 years up to the middle of February 2020, the FTSE 250 soared by 132% compared to just 38% for the FTSE 100. Superior dividends would have added to the latter’s overall result, but I reckon that’s still an impressive outperformance.
Resilient performance
When the 2020 stock market crash hit, the mid-cap index fell harder than its bigger sibling. We did see something of a recovery in the latter part of 2021. But 2022 fears seem to have headed off the 250’s resurgence. Since mid-February 2020, we’re looking at an overall 7% decline for the FTSE 250, while the FTSE 100 is almost bang on zero overall change.
So the smaller index has suffered a bit more during hard times, but really not by much. And that has surprised me. I’ve long been aware of the FTSE 250’s relative strength during upbeat times. But I had expected to see considerably more pain when the next market fall came along. The FTSE 250, then, seems to be more resilient than I thought — judging by the recent crash, at least.
So is my portfolio allocation poor, and could it be improved? I think it could be. On current valuations, my stock market investments (ISA and SIPP) are 49% weighted to the FTSE 100. Only 24% of my invested cash is in the FTSE 250, and the remaining 27% is elsewhere.
Buy more FTSE 250 shares?
I rarely think about such allocation, preferring to focus on individual shares that I like regardless of what index they’re in. And I do still have a few FTSE 100 companies on the list of stocks I’d like to buy. But what FTSE 250 shares are there out there that might help balance my investments better, and that I like the look of on their own merits?
Howden Joinery (LSE: HWDN) is one. I missed the soaring shares during lockdown. But the price has gone off the boil a bit in 2022. I would consider buying on further weakness. And despite the risks, I really am tempted to put a small amount into the very volatile cybersecurity specialist Darktrace (LSE: DARK).