This hugely underrated and arguably under-reported index offers investors three big plays – the UK as a distinct national economy, plus a profusion of growth companies and much greater diversification compared with the FTSE 100. It's also worth noting that over much of the past 10 to 20 years the index has also offered better returns with lower volatility.
The FTSE 250 index is a crucial index because it's very much focused on UK plc as an economy, with companies that will genuinely capture the future growth potential of the British economy, mostly through sterling-based earnings. Obviously in a recession, that UK focus is something of a weakness and the larger-cap indices with their globally diversified components might seem like a safer play. But FTSE 250 also tends to be jam-packed full of faster growing companies, many of them having risen from the FTSE Small Cap index, with more than a few on their way up into the FTSE 100. Many investors are also strongly attracted by the diversification on offer in this index – those 250 companies (actually many index trackers have 252 funds) include a huge range of companies and the top holdings comprise much less than 5 per cent of the total index value. It's also worth noting that the FTSE 250 comprises just under 15 per cent of the wider FTSE All-Share index.
There are also some equally obvious weaknesses with the FTSE 250 – it's still very focused on financial companies and there are a large number of big investment trusts that tend to dominate the index alongside a chunky number of industrials. Should you buy it? The FTSE 250 is one for more risk-tolerant investors who don't mind taking on the potential for greater rewards – it tends to rise faster and fall faster than its bigger siblings (the FTSE 100 and All-Share). As for funds there's one major unit trust tracker from HSBC plus three cheaper ETFs from iShares, Lyxor and Deutsche, all of which charge less than 0.5 per cent.
