The FTSE 250 is an index of hundreds of companies spanning different industries and territories. It’s delivered an average annual return of 11% since 1994. By comparison, the FTSE 100‘s produced a more modest 7% since it began in 1984.
The FTSE 250‘s outperformance reflects its high concentration of mid-cap stocks. These are often growth-oriented companies that are more agile and have significant potential to increase profits compared to the Footsie’s heavyweight shares.
As a consequence, they have far greater room for share price appreciation.
However, in recent years the FTSE 250 has struggled to rise. During the past five years it’s appreciated just 3.1%. That’s far below the FTSE 100’s 12.7% rise over the same period.
Could the tide be about to turn, though?
Bouncing back?
The FTSE 250’s strong performance so far in 2024 is a positive omen.
Since 1 January, the FTSE 250 has risen 6.5% in value. That’s just a shade below the FTSE’s 6.6% increase.
This means that I’d have around £31,950 in my account if I’d invested £30,000 in a tracker like the Vanguard FTSE 250 UCITS ETF. That’s excluding dividend income as well.
Reasons to be cheerful
That’s all well and good. But can the index continue its fine form looking ahead?
There are obvious challenges, like the prospect of prolonged poor growth in the UK (around 70% of the FTSE 250’s earnings are generated on these shores).
But there are also reasons to be optimistic. Inflation is falling and central banks the world over are cutting interest rates. This means consumers and business should have more money to spend going forwards.
Years of the index’s underperformance also means many FTSE 250 shares remain ultra cheap right now. As investor frostiness towards UK asset thaws, this could encourage further gains across the mid-cap space as bargain hunters jump in.
A top FTSE 250 stock
Investors can try to harness large returns by buying a tracker like the one described above. Instruments like this exchange-traded fund (ETF) can be great at helping me reduce risk by spreading my money across the whole index.
On the downside, I’ll never beat the market by buying simple trackers like this. In order to do this, I need to identify individual shares to buy.
I believe investing in specific shares as well as ETFs can be a great way to balance risk and reward. Games Workshop (LSE:GAW) is one FTSE 250 share I’ve bought for my own shares portfolio.
The company’s share price has rocketed 21.5% in the year to date. This takes total gains in the past five years to 164.4% as its profits have taken off.
Revenues here can soften during economic downturns. But Games Workshop has so far still managed to thrive thanks to its leading position in a niche industry. Its Warhammer line of products are the gold standard in tabletop gaming, and attract a huge (and growing) fanbase across the globe.
I think the share has much further to rise, too, as it expands globally and explores television and film deals for its content. Earnings here leapt 12% in the last financial year.
This post was originally published on Motley Fool
