FTSE 100 vs FTSE 250: Which is the better buy for your SIPP?
Trying to find the best investments for your SIPP is a tricky process. If you are like me, you want to buy stocks that you can buy and forget about for the next few decades.
Unfortunately, finding companies that can survive the test of time is harder than it first appears. That's why I've decided to invest a portion of my retirement fund in the FTSE 100. This fund gives me a stake in the UK's top 100 companies, and I don't have to worry about the fundamental health of each one.
But have I made the right decision? The FTSE 100 might be the UK's leading blue-chip index, but the FTSE 250 has produced better returns over the past decade.
Home vs away
Over the past decade, the Footsie 100 has produced a total annual return of 7%. That's including reinvested dividends. Over the same period, the FTSE 250 has chugged higher with a return of 11.1% per annum, beating its blue-chip peer by 4.1% each year.
So if I had invested back in 2008, the FTSE 250 would have been the better choice. However, I can only make this statement in hindsight, which is pretty useless when deciding how to invest my money today.
Why the FTSE 250 has outperformed over the past 10 years? Unlike the FTSE 100, this second level index is made up of much smaller companies with a greater focus on the UK. Some 70% of the FTSE 100's profits come from outside the UK, so the index is more of a barometer of global economic health than anything else.
Over the past decade, the UK economy has recovered faster than the rest of the world from the global financial crisis. It seems this helped the UK-centric FTSE 250 push higher.
Unfortunately, since the EU referendum in the middle of 2016, compared to the rest of the world, the UK economy has slowed. At the same time, the value of the pound has collapsed. This has shifted the balance between the two indexes. On a three-year annualised basis, the FTSE 250 has produced a total return of 9.2%, underperforming the FTSE 100's 10.4%.
I reckon this is a sign of things to come. For the next few years at least, uncertainty will prevail in the UK, and I want some protection against the worst-case scenario in my portfolio. The FTSE 100 is one of the best ways to do this. That being said, I don't expect UK plc to go into reverse, but I do think growth will be slower over the next 10 years than it has been since 2008.
The bottom line
So if I have to pick just one index, I would stick with the FTSE 100, although I wouldn't be against including a combination of the two.
Of course, whatever you decide to do will depend on your own financial circumstances and portfolio composition. Nevertheless, as a long-term investment in the global economy, I would stick with the blue-chip index.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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