The FTSE 250 is the second most popular index used by British investors to benchmark their portfolio returns. It’s a market capitalisation-weighted index that contains the largest 101st to 350th companies listed on the London Stock Exchange.

The FTSE 250 was launched in October 1992, approximately eight years after the UK’s flagship index, the FTSE 100. It has since become popular among growth investors as the index primarily contains mid-cap and small-cap stocks that offer superior potential capital gains. And more aggressive passive investors often pick the FTSE 250 when selecting an index fund.

How does the FTSE 250 work?

The FTSE 250 contains 250 stocks selected based on their market cap. As of November 2022, the index’s total market value stood at just over £333.69bn. That means the FTSE 250 contains roughly 8.8% of the £3.78trn market cap of all companies listed on the London Stock Exchange.

To be included in the index, a business needs to have at least the 350th largest market capitalisation in the United Kingdom. However, the stock also needs to have a market cap that is less than the 100th largest company. If it exceeds this limit, the business will join the FTSE 100 index instead, kicking out an existing member who will fall into the FTSE 250.

Just like the FTSE 100, the FTSE 250 is rebalanced every quarter in March, June, September, and December. A company’s position within the index is also often volatile, especially for stocks near the bottom of the list. Why? Because these smaller businesses are typically subject to increased trading volatility.

Being a capitalisation-weighted index, the constituent stocks with the largest market caps within the index have a higher weighting than the smallest. As such, the share price movement of these larger enterprises has a bigger impact on the level of the index.

As of January 2023, the ten largest UK stocks within the FTSE 250 index include:

1. Hiscox (LSE:HSX)
2. Investec (LSE:INVP)
3. Mediclinic International (LSE:MDC)
4. Inchcape (LSE:INCH)
5. Hikma Pharmaceuticals (LSE:HIK)
6. IMI (LSE:IMI)
7. Diploma (LSE:DPLM)
8. Greencoat UK Wind (LSE:UKW)
9. Intermediate Capital Group (LSE:ICP)
10. Howden Joinery Group (LSE:HWDN)

What is the average return on FTSE 250?

The FTSE 250 was first launched in October 1992. And since then, its constituents have grown considerably. The index’s total return (capital gains + dividends) over the last 30 years is approximately 1,947%. On an annualised basis, that’s the equivalent of a 10.6% annual return on investment.

That’s significantly ahead of the FTSE 100’s 7.15% average annual return to investors. And when compounded over decades, the 3.45% difference has an enormous impact.

Suppose an investor bought £10,000 worth of shares in an exchange-traded fund tracking the FTSE 250 back in 1992. In that case, their investment would be roughly worth £251,663 today. By comparison, the same investment in the FTSE 100 would be worth closer to £84,878 – a £166,785 difference.

However, this higher rate of return is not without its caveats. As previously mentioned, the FTSE 250 predominantly consists of mid and small-cap stocks, which opens the door to increased volatility. And in the short term, the index can significantly underperform.

For example, in 2022, the FTSE 250 fell by nearly 20% during the stock market correction. By comparison, the FTSE 100 was flat.

FTSE 250 vs other indices

The FTSE 250 isn’t the only benchmark index widely used to track the performance of the British stock market. Others include the previously mentioned FTSE 100, FTSE 350, and FTSE AIM 100. But how do these compare?

FTSE 250 vs FTSE 100

The FTSE 100 was launched in January 1984 and contains the largest 100 publically traded stocks on the London Stock Exchange by market cap. It is also rebalanced on the same quarterly schedule as the FTSE 250 and is similarly weighted based on the market capitalisation of its constituent shares.

The returns generated by the FTSE 100 have been less impressive. However, the larger size of its constituents provides far more defence against market volatility. Furthermore, as most of the businesses within the index are mature, the majority pay a handsome dividend, more so than the companies inside the FTSE 250.

As such, the average dividend yield for the FTSE 100 stands close to 4.1% versus the FTSE 250’s 3.2%. This makes the FTSE 100 a more popular choice among conservative-income investors.

FTSE 250 vs FTSE 350

The FTSE 350 is a capitalisation-weighted index that contains the 350th largest companies on the London Stock Exchange. In effect, it serves as a combination of the FTSE 100 and the FTSE 250, giving investors exposure to large-cap, mid-cap, and small-cap UK stocks.

Due to the increased diversity across companies of different sizes, some professional traders believe it to be a more accurate proxy for the state of the British economy. Despite this, it remains a largely unpopular index compared to the FTSE 100.

Since July 1994, the index has delivered a total return of approximately 746% as of December 2022. That’s the equivalent of 7.9% on an annualised basis.

FTSE 250 vs FTSE AIM 100

The FTSE AIM 100 is another market cap-weighted stock index. It was launched on 16 May 2005 and contains the largest 100 stocks listed on the Alternative Investment Market (AIM). AIM is a subsection of the London Stock Exchange. And it’s home to typically tiny businesses that are too small to be listed on the main exchange.

As such, even though the index contains the most prominent companies listed on AIM, these are still small-cap stocks. And several firms venture into micro-cap and penny stock territory.

FTSE 250 index sector weightings

Companies within the FTSE 250 cover a broad range of industries. However, the index itself is generally a poor proxy for the UK economy. Why? Because the vast majority of FTSE 250 stocks reside within the financials sector.

List of all FTSE 250 companies

Is FTSE 250 a good investment?

The concentrated allocation towards the financials sector paired with relatively small businesses makes the FTSE 250 index a volatile trading ground. But this volatility comes alongside the potential for higher returns. And for risk-seeking growth investors, investing in the stock market index could be a suitable investment strategy.

However, for more conservative investors with little stomach for rapid price fluctuations, buying shares of an FTSE 250 index fund is likely an unsuitable decision. In the end, whether the FTSE 250 is, a good investment ultimately depends on the individual investor and their investment goals, risk tolerance, and time horizon.

The bottom line

The FTSE 250 is one of the most widely followed indices in the United Kingdom by long-term investors and short-term traders. It provides portfolio exposure to smaller businesses which can be a tremendous source of growth for those willing to take on additional risk.

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.