Jasmine Birtles
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What is The FTSE Small Cap Index and How to Invest In It?
Ruby Layram
8th Aug 2024
2024 has been a pretty good year for small cap stocks with the FTSE small cap index outperforming the FTSE 100 and 250 by quite a bit! Investing in the small cap index is a great way to diversify and take advantage of growth markets – which can provide substantial returns.
But, what is the FTSE Small Cap index and how can you invest in it?
In this guide, we cover everything you need to know to get started.
- What is the FTSE Small Cap?
- Why Invest in the FTSE Small Cap Index?
- How To Invest in the FTSE Small Cap Index
What is the FTSE Small Cap?
The FTSE Small Cap Index is the lesser-known sibling of the more famous FTSE 100 and FTSE 250 indices.
It includes the smallest 10% of companies listed on the London Stock Exchange by market capitalization.
These are the companies that may not (all) be household names but have loads of potential for growth.
3 Stocks That Are in the FTSE Small Cap
Although many of the stocks listed in the small cap index are unheard of, you will find a few familiar names. Here are 3 stocks that are listed in the index you’ve probably heard of before.
ASOS (ASC)
First up, we have ASOS, the online fashion giant.
ASOS has been a game-changer in the retail world, especially among younger shoppers. Its innovative approach to fashion and technology makes it a fascinating stock to watch.
If you want to gain exposure to the growing online commerce market, ASOS could be a great addition to your portfolio.
Gym Group (GYM)
Next up is the Gym Group. As health and fitness continue to be a priority for many, this company is making fitness more accessible with affordable gym memberships.
With a strong presence in the UK, Gym Group is riding the wave of the health and wellness trend, making it another exciting stock in the FTSE Small Cap Index.
Metro Bank (MTRO)
Another one that you might recognise is Metro Bank. Known for its customer-friendly approach and longer opening hours, Metro Bank is shaking up the traditional banking model.
It aims to provide a better banking experience, which could lead to significant growth as more people seek out alternatives to the big banks.
Why Invest in the FTSE Small Cap Index?
So, why should you consider the FTSE small cap index?
Investing in the FTSE Small Cap provides exposure to LSE-listed stocks that don’t appear in the more popular FTSE 100 and 250 indexes.
Here are a few reasons why this might be a good thing!
Small cap stocks have significant growth potential
One of the biggest benefits of small cap stocks is their growth potential. These companies are often in the early stages of their growth journey, which means they have more room to expand compared to their larger counterparts.
Investing in small caps can sometimes feel like finding a hidden gem that has yet to reach its peak. Many small cap stocks are undervalued and are practically guaranteed to grow over time.
Diversification
Investing in the FTSE Small Cap Index also provides diversification. The index covers a wide range of sectors, from retail and fitness to finance and technology.
This means you’re not putting all your eggs in one basket, which can help spread risk and increase your chances of seeing returns from different areas of the market.
Investing in small cap stocks can be risky and diversification is the best way to minimize this risk.
500% Increase in Free Cash Flow from 2018 to 2023
Here’s a statistic to make your ears perk up: there’s been a 500% increase in free cash flow among FTSE Small Cap companies from 2018 to 2023.
This means these companies are not just growing in terms of revenue but also generating more cash, which is a good sign of financial health and stability.
Outperform the FTSE 100 and 250
Historically, small cap stocks have shown they can outperform the larger indices like the FTSE 100 and FTSE 250.
While they come with higher risk, the potential for higher returns can make them an attractive option for investors looking to boost their portfolio’s performance.
How To Invest in the FTSE Small Cap Index
If you would like to add small cap stocks to your portfolio, investing in the FTSE small cap index is a great way to do it!
One of the easiest ways to invest in the FTSE Small Cap Index is through ETFs.
These funds track the performance of the index, allowing you to invest in a broad range of small-cap stocks without having to pick and choose individual companies.
Here’s how to invest in a small-cap ETF.
Step 1: Find a Reputable Broker
Your first step is to find a reputable broker. Look for one that offers a user-friendly platform, reasonable fees, and strong customer support.
There are plenty of options out there, so take your time to find the one that best suits your needs.
I personally like VanEck and eToro.
*your money is at risk
Step 2: Create and Fund an Account
Once you’ve chosen your broker, you’ll need to create an account and fund it.
This usually involves providing some personal information and linking a bank account. Don’t worry; it’s typically a straightforward process.
Just make sure that you have proof of ID to hand as well as access to your bank details.
Step 3: Search for the FTSE Small Cap ETF
Now, here’s where the fun begins. Use your broker’s search function to find the FTSE Small Cap ETF.
You might find several options, so check the details to ensure you’re choosing the right one.
It’s a good idea to research different small cap ETFs to find one that suits your long-term investing strategy.
Step 4: Place an Order
Finally, place an order for the ETF. You can choose to buy a certain number of shares or invest a specific amount of money.
Once the order is executed, congrats—you’re now an investor in the FTSE Small Cap Index!
Investing in the FTSE Small Cap Index can be an exciting way to diversify your portfolio and tap into the growth potential of smaller companies.
While it comes with its risks, the rewards can be substantial for those who do their homework and invest wisely.
Remember, always consider the risk involved with investing and speak to a financial expert before putting any money on the line.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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