Is It Time To Ditch The FTSE 100 And Pile Into The FTSE 250?

While the FTSE 100 is considered to be the crème de la crème of UK listed companies, the reality is that the FTSE 250 has offered far superior returns in recent years. For example, the mid-cap index has risen by 69% in the last 10 years, while the large-cap index is up by just 3%. As such, investing your hard-earned cash in a range of FTSE 250 companies could have yielded a return 23 times higher than having invested the same money in FTSE 100-listed companies.

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Of course, one argument for the FTSE 100 has been its superior liquidity by its very nature. The FTSE 100 contains the biggest 100 companies by market cap in the UK and they therefore tend to have better liquidity and smaller spreads (the difference between the buying and selling price) than their smaller peers. However, for the level at which most private investors trade (i.e. in the thousands, rather than millions), the FTSE 250 offers more than adequate liquidity. This means that there's in reality not a great deal of difference between the top and the bottom of the FTSE 350 when it comes to liquidity.

Volatility

Furthermore, the lack of volatility of the FTSE 100 is often considered to be a major selling point. In other words, because the FTSE 100 contains larger and generally more mature companies, it's not subject to the same degree of volatility or company-specific risk as is the case for the FTSE 250. This apparently makes the returns for investors in the FTSE 100 more predictable and resilient, although the returns of the two indices in the last 10 years highlight that this doesn't appear to be the case.

For example, the maximum loss experienced by an investor buying shares in the FTSE 100 10 years ago would have been 37%, while for the FTSE 250 that figure is only slightly higher at 44%. For most investors, the maximum gain during that period of 83% for the FTSE 250 versus 18% for the FTSE 100 makes the slightly higher level of volatility of the former well-worth it in the long run.

Income

Clearly, the FTSE 100's income prospects are better than for the FTSE 250. The former has a yield of 4%, while for the latter it's considerably lower at 2.7%. However, a number of shares within the FTSE 250 have yields higher than 4%, so it's still possible to generate a 4%-plus yield within the FTSE 250. And with their profitability often growing at a faster rate than is the case for their larger peers, FTSE 250 stocks may be better able to grow dividends at a rapid rate too.

Despite this, the FTSE 100 remains a superb place to invest. It has delivered a total annualised return of over 9% since its inception in 1984 and so has the potential to deliver a similar performance in future. However, the FTSE 250 remains at least as appealing as the FTSE 100 and this means that having a mixture of stocks from both indexes within a portfolio seems to be a sound move for long-term investors.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.