I think the FTSE 250 could be the index to go for in 2019, and here’s why

Stock markets are crumbling, and the FTSE 100 has been making headline news as it’s fallen to a two-year low over the past week.

But you might not have noticed that the FTSE 250 has managed the same unenviable feat, having put in a worse performance in 2018 than its bigger sibling. So far in 2018, while the FTSE 100 has lost approximately 10% of its value, the FTSE 250 has outdone it with a fall of 14%.

Reversal

Admittedly, that is to some extent a reversal of the mid-cap index’s outperformance over the past five years. At its recent peak in June this year, the FTSE 250 was showing a five-year gain of 40% while the FTSE 100 was up 17%, but rolling forward six months to today, we’re looking at five-year rises of just 14% and 3% respectively.

That does show that smaller shares are riskier, or at least more volatile in the short term, and those who were happy to take on extra risk for the significant outperformance that peaked this summer might be ruing their choice a little now that we’re seeing fear-driven convergence again.

That’s compounded by the difference in dividend yields between the two indexes too, as the FTSE 250’s five-year yield of just 13% has been well beaten by the FTSE 100’s 18.4% — bringing the FTSE 250’s total return outperformance over five years down to just a few percent.

Company problems

Over that period, a lot more FTSE 250 companies have fallen on hard times than FTSE 100 companies, even bearing in mind there are 2.5 times as many of the former. On the day I’m writing these words, for example, shares in Superdry fell 35% after a profit warning and are down 80% so far in 2018.

And Dixons Carphone shares lost 14% after the firm reported a £440m loss for the first half and had to write down the value of its Carphone Warehouse mobile business. Debenhams has been hit hard too, with its shares crashing 84% and forcing it down into the FTSE Small Cap index.

In short, by its very nature, the FTSE 250 is home to a lot of smaller companies, and they’re the ones that tend to suffer the most during a downturn.

Having said all that, why do I think the FTSE 250 could be a good bet for 2019 and beyond? I think the recent fall was a needed correction and I see the index as significantly better value now.

Long-term growth

If you’re looking for growth, the FTSE 250 is where the bulk of growth companies are to be found, and it’s as true today as it always was that every big company started off small. I do think you need a longer investing horizon if you’re going for smaller FTSE 250 shares than for FTSE 100 companies, mind, as I expect the FTSE 250 to keep on exhibiting more volatility.

I also think the FTSE 250 is a better barometer of political and economic conditions, in that it’s likely to rise higher in bullish times and fall lower in bearish times. But I think that makes it a better index to buy during times of maximum pessimism, and I reckon we’re in (or close to) one now.

Brexit will surely become clearer during 2019, and reduced uncertainty could kick off another FTSE 250 bull run.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Superdry. 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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