The FTSE 250, or Financial Times Stock Exchange 250, is the second most popular stock market index in the United Kingdom. It contains the largest 101st to 350th companies in order of market capitalisation listed on the London Stock Exchange. And this guide explains how to invest in the FTSE 100.
How to invest in the FTSE 250?
Like any other stock market index, it isn’t possible to buy shares directly in the FTSE 250. Instead, investors must indirectly purchase shares through an index fund which can take the form of a mutual fund or exchange-traded fund (ETF).
1. Open a brokerage account
An investor must have a brokerage account to access and invest in the financial markets. These are sometimes referred to as investment accounts.
There are various types of brokerage accounts to choose from. And each offer different features, advantages and drawbacks. Investors must consider their personal circumstances and intended investing strategy when deciding what type of account is suitable.
- Standard Account – This is the most common type of investment account. Investors deposit capital which can then be used to invest in an array of financial products, including stocks, bonds, mutual funds, trusts, and ETFs. In the United Kingdom, all capital gains and dividends received through investments in a standard trading account are subject to tax.
- Employer-Sponsored Retirement Account – This is a special investment account with certain tax benefits. However, withdrawals from this account are limited until investors reach a certain age. They are designed to be a saving instrument for pensions. The most common type of employer-sponsored retirement account in the United States is a 401(k).
- Stocks and Shares ISA Account – This is a special tax-efficient investment account for British investors only. All capital gains and dividends received from investments within a Stocks and Shares ISA are tax-free. However, investors are limited to depositing a maximum of £20,000 per year.
- Self-Invested Personal Pension (SIPP) Account – This is a particular tax-deferred investment account for British investors only. Capital gains and dividends received from investments are protected from tax. However, investors cannot withdraw any funds until reaching the age of 55 (57 from 2028). When funds are taken out, they are taxed as regular income.
2. Pick an index fund
With an investment account open, the next step is to pick a suitable index tracker fund. For individuals seeking to invest in the FTSE 250, a FTSE 250 index tracker fund is required. However, investors also need to consider what type of index fund they want to own – a mutual fund or exchange-traded fund (ETF).
A mutual fund is not traded on an exchange. Instead, orders to buy and sell shares within a mutual fund are settled once daily at the end of each trading session. On the other hand, ETFs are traded on an exchange and orders are executed instantly.
Investors should be aware of additional differences between the two investment vehicles. We’ve written a complete guide that can be accessed below.
Beyond deciding on the index fund type, additional factors must be considered.
- Expense Ratio – As index tracker funds are typically passively managed, the annual management fees are reasonably low. However, they are not zero. And some may even charge entry fees when first buying shares or exit fees when selling shares. The expense ratio combines all these costs, adversely affecting the overall investment return. On average, the expense ratio of a passive fund typically lies between 0.05% and 0.15%. Generally speaking, investors should focus on the funds that charge the lowest fees.
- Minimum Investment Requirements – Some index tracker funds require investors to purchase a minimum amount of shares. This is typically more common among certain mutual funds rather than ETFs. Nevertheless, minimum investment requirements could create barriers to entry for lower net-worth investors.
- Dividends – All shareholders in an index fund are entitled to receive dividends from the companies inside the fund’s investment portfolio. However, depending on the dividend policy, any received income may be automatically reinvested into the fund’s portfolio rather than distributed to shareholders’ investment accounts. This type of dividend policy is more commonly referred to as accumulation.
An investor could reduce their expense ratio to zero by not investing in an index fund but instead buying the individual stocks of the index themselves.
However, this approach would likely rack up many transaction and commission fees in practice. It also requires more effort as portfolio rebalancing would no longer be handled by a professional fund manager but rather the individual investor themselves. In other words, taking this alternative approach is unlikely to be cost-effective.
3. Buy shares in the index fund
With a brokerage account opened and an FTSE 250 index fund selected, investors can now buy shares and replicate the index’s performance.
As a reminder, if shares in a mutual index fund are purchased, the transaction will not be executed until the end of the current or next trading session. However, trades for an index ETF will be executed instantly while the stock market is open.
Advantages of investing in the FTSE 250
Buying shares in a FTSE 250 index fund provides passive investors with several unique advantages.
- Instant Diversification – An investor has indirectly bought shares in every company within the underlying index by owning an index fund. Consequently, a portfolio is automatically diversified across multiple businesses, industries, and geographies.
- Higher Growth – The index consists of mid-cap and small-cap stocks that have the potential to deliver superior returns. Over long time periods, the FTSE 250 has historically outperformed other leading UK stock market indices, including the FTSE 100.
- Low Fees – Index tracker funds are almost always passively managed. Lower management fees come with a smaller expense ratio and, subsequently, deal less damage to total investment returns. Investing through an index fund is also typically more cost-effective than buying shares of each individual stock in an index.
Disadvantages of investing in the FTSE 250
While the FTSE 250 has historically delivered superior returns, these come with some drawbacks.
- Sector Concentration – Despite containing 250 businesses, approximately 44% of the FTSE 250’s market capitalisation resides within the financial sector. Should a slowdown occur within this industry, it could lead to significant investment portfolio underperformance.
- Volatility – As the index contains mid-cap and small-cap stocks, it’s far more susceptible to stock market volatility than a large-cap stock index such as the FTSE 100. This can cause large fluctuations in the value of an investment portfolio.
- No Control – Index tracker funds do not have a stock selection criteria beyond a business being a constituent of the index being tracked. As such, it’s possible for investors to indirectly own shares in companies that may not align with their ethical or moral values. For example, there are several tobacco stocks within the FTSE 100. However, there is no way to avoid these businesses when buying shares in an index fund.
Can I lose money by investing in the FTSE 250?
Yes. Every investment carries risk. And that’s especially true for small and medium-sized businesses that are more susceptible to economic and industry fluctuations.
Owning shares in a FTSE 250 index fund lets investors indirectly own a piece of every company within the index. However, should the earnings of these firms become compromised, it could lead to a decline in share price or result in dividends being cut. Should either of these events occur, it will adversely influence the performance of the FTSE 250 and, in turn, the investor’s investment.
Top 10 FTSE 250 stocks
Below are the top 10 FTSE 250 companies in order of market capitalisation as of 8 January 2023.
|8||Greencoat UK Wind||UKW||£3.50bn|
|10||Howden Joinery Group||HWDN||£3.43bn|
Related: Complete list of all FTSE 250 stocks
Alternatives to the FTSE 250
The FTSE 250 is not the only stock market index investors can track. Here is a list of alternative indices which investors can choose from.
- FTSE 100 – The stock market index tracks the performance of the largest 100 UK stocks by market cap.
- FTSE 350: This index comprises both FTSE 100 and FTSE 250 companies. Investing in an index tracking its performance provides another alternative.
- FTSE AIM 100 – This index includes the largest 100 UK stocks by market capitalisation, which have their primary listing on the Alternative Investment Market (AIM).
- S&P 500 – This stock market index tracks the stocks of 500 large-cap US companies
- Dow Jones Industrial Average – This stock market index tracks the performance of the 30 largest and most prominent companies.
The bottom line
While an investor can not directly invest in the FTSE 250 index, one can invest in index funds that track its performance. A professional handles investment management tasks such as portfolio rebalancing, automating much of the leg work. However, investing through an index fund makes it impossible to outperform the stock market.
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This article contains general educational information only. It does not take into account the personal financial situation of the reader. Tax treatment is dependent on individual circumstances that may change in the future, and this article does not constitute any form of tax advice. Before committing to any investment decision, an investor must consider their individual financial circumstances and reach out to an independent financial advisor if necessary.