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Aug 24

What is the FTSE 250 index and how do you invest in it?

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The FTSE 250 is a share index consisting of 250 companies listed on the London Stock Exchange (LSE). The 250 is typically more volatile than its FTSE 100 cousin, and is often the index of choice for investors looking to put their faith in smaller, growing companies.

So, why do you need to know about the FTSE 250? What companies are currently members of the index? And how can you invest in it?

Read on to find out the answers, or click a link below to go straight to a specific spot…

What is the FTSE 250 index?

The FTSE 250 consists of the 101st to the 350th largest companies listed on the London Stock Exchange (LSE), based on ‘market capitalisation’. If you were wondering, the acronym ‘FTSE’ refers to Financial Times Stock Exchange.

The FTSE 250 is updated four times a year – in March, June, September and December – so constituents may enter or leave the index.

If you’re interested to learn more about all of the FTSE share indices, take a look at our article that explains what is FTSE and why you should care.

Why is the FTSE 250 popular with investors?

The FTSE 250 is often considered the share index that best represents the health of the British economy. In other words, investing in the index arguably provides the best way of getting exposure to UK markets.

To understand why this is, it’s worth getting your head around the fact that roughly 25% of sales by members of the FTSE 100’s are conducted in Britain. This compares with roughly 50% of sales made by FTSE 250 members.

To put it another way, the performance of the FTSE 100 is more likely to be influenced by international markets. The 250 is more likely to be affected by issues closer to home.

Aside from its UK-bias, another reason why investors may be attracted to invest in the FTSE 250 share index is because it also contains a high number of smaller, growing companies. While, the FTSE 100 generally consists of more established organisations, the 250 typically contains companies that are yet to hit their full potential.

Because of this, the performance of the FTSE 250 is often more volatile than its cousin. This means that in a growing economy, the share index typically delivers higher returns than other, more conservative indexes.

On the other hand, during more challenging times, the FTSE 250 index often performs poorly.

how has the FTSE 250 performed recently?

Over the past 20 years, the FTSE 250 has risen a staggering 286%. Meanwhile, the FTSE 100 has risen just 70.1% over the same period – though it has delivered higher dividends.

Yet in more recent times, these indices have experienced different fortunes.

At the time of writing, in Summer 2022, the UK economy is on the brink. Not only has a recession has been predicted by the Bank of England, but interest rates are rising fast, and inflation is rampant.

As of 24 August 2022, the FTSE 100 has risen 4.7% over the past 12 months. Compared to a year ago, it’s down by a modest 0.58%.

The FTSE 250, in contrast, is down a massive 19.38% over the past 12 months. Since the beginning of the current year, it’s fallen 19.42%.

Given the fact that the FTSE 250 typically consists of smaller, growing companies, these are exactly the types of  organisations that can be more vulnerable in a struggling economy. As a result, it perhaps shouldn’t be surprising to see that the index has taken a big hit in recent times.

While it can be interesting to look at past performance of share indices, always be mindful that past performance should not be used as a reliable indicator of future returns.

What companies are constituents of the FTSE 250?

The FTSE 250 consists of the 101-350 largest companies listed on the LSE. As a result, the index reshuffles regularly depending on the performance of individual companies.

With this in mind, here are 10 big-name constituents at the time of writing.

  1. ASOS (ASC)
  2. Aston Martin Lagonda (AML)
  3. AJ Bell (AJB)
  4. EasyJet (EZJ)
  5. Greggs (GRG)
  6. Marks & Spencer Group (MKS)
  7. Moonpig (MOON)
  8. National Express Group (NEX)
  9. Royal Mail (RMG)
  10. Wetherspoon (JDW)

A full list of current constituents can be found on the London Stock Exchange website.

Why invest in the FTSE 250?

As we’ve already touched on, investing in the FTSE 250 can be an excellent way of gaining exposure to UK markets. The index is also more volatile than other major indices. So, if you like to live life in the fast lane, this may be another reason as to why you may be tempted to invest in the index.

More generally, if you invest in a collective index, you can limit the risk of your portfolio suffering large falls. For example, if you invest in the 250 and the value of a single constituent plummets, the performance of hundreds of other constituents in the index may help to cushion the blow.

Investing in the 250 may also be worthwhile for those with a long-term investing mindset. That’s because investing in a share index – often via an index-tracking fund- is a common trait among passive investors who wish to benefit from the collective performance of hundreds of companies, rather than picking individual stocks.

how to invest in the FTSE 250

If you wish to put your faith in the FTSE 250, there are a few ways to do so.

  1. Invest in a FTSE 100 index-tracking fund or ETF. If you buy a index-tracking fund or ETF that tracks the FTSE 250, your investment will aim to follow the performance of all 250 constituents. When the index rises, so will your investment (and vice-versa). This is arguably the most straightforward way to invest in the index, but you’ll have to pay close attention to fees. Remember, high fees can eat into your profits! Examples of funds that track the index include the ‘HSBC FTSE 250 Index (Class S)’, ‘FTSE 250: Vanguard FTSE 250 UCITS ETF’, and the ‘iShares FTSE 250 UCITS ETF’.
  2. Buy shares in individual companies. If you don’t want to invest in every 250 constituent, then it’s possible to buy shares in individual companies within the index. To do this, you’ll need to find an investing platform in which to buy shares. Fees can vary massively between providers, so finding a broker with low fees is worthwhile. eToro is one provider that doesn’t charge a commission for buying shares.If you’re new to investing do take the time to read our comprehensive how to buy shares guide.
  3. Buy shares in every constituent. If you don’t fancy the idea of a tracker fund, then buying shares in every FTSE 250 member is an option – albeit an expensive one. To do this, you’ll need to take a look at the current constituent list and then buy 250 individual shares through a broker of your choosing. If you go down this route pay close attention to share dealing fees, as you’ll need to make a lot of single share purchases. Also, if you want to ensure you only ever invest in FTSE 250 members, you’ll have to update your portfolio on a regular basis, as constituents enter and leave the index every four months.

What should investors be aware of?

While the FTSE 250 can be a great way of putting your faith in UK-based companies, it doesn’t give much exposure to global markets. This means that if you only invest in the 250, your portfolio may be heavily influenced by economic and political events in the UK. There’s the value of the pound to consider too.

Investing solely in UK-based indices may also be a problem if global markets begin to outshine the UK. If you’re worried about this, you may wish to explore diversifying your portfolio by investing in a global index-tracker fund.

As with any type of investing, understand that your capital is at risk. Also remember that the value of your investments can rise and fall.

DisclaimerMoneyMagpie 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. 

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