As an investor, whether you’re new to the game or have been around for a while, you’re often faced with choices that can significantly impact your portfolio. One such decision that many UK investors are contemplating in light of the recent fall of the GBP, is whether to channel their investments into the FTSE 100 or the FTSE 250.
To make an informed decision, one needs to understand the fundamental differences between the FTSE 100 and the FTSE 250. The FTSE 100 includes the 100 largest companies listed on the London Stock Exchange, while the FTSE 250 comprises the next 250 companies. It’s noteworthy that the FTSE 100 is considerably more international, with many of its listed companies generating significant revenue from overseas, while the FTSE 250 is more domestically focused.
FTSE 100: Shielded Overseas Earnings and Broad Market Base
Given the recent depreciation of the pound, some investors believe that FTSE 100 companies might be shielded from some of the economic fallout due to their substantial overseas earnings. Moreover, these companies have a broader base, which may protect them from a wide sell-off of British assets, something we’ve witnessed over the last few years with the pandemic, Brexit, etc.
FTSE 250: Volatility, Growth Potential, and Hands-on Approach
On the other hand, others argue that the FTSE 250, while more volatile and at a higher risk of further decline, represents a growth opportunity. This is because these companies are more closely tied to the UK economy, and if it recovers, they stand to benefit substantially.
However, investing in the FTSE 250 necessitates in a few investors require a more hands-on approach. Some investors argue that one needs to “dig around” the 250 and be selective, a strategy that seems counterintuitive to the essence of index investing. While there might be attractive companies in the FTSE 250 that have been oversold due to margin calls, there are also potentially weaker companies that could be delisted. Thus, an investor would need a longer horizon of years, to weather out the fluctuations in the market.
FTSE 350: The Blend of International and Domestic Exposure
Another option is the FTSE 350, which combines both the FTSE 100 and FTSE 250, offering a blend of both international and domestic exposure. However, the composition of the FTSE 350 is heavily skewed towards the FTSE 100 companies due to their larger market capitalization. Something similar that we see in the S&P 500, is reliant on a few large companies.
Deciding Between FTSE 100 and FTSE 250: Your Investment Strategy Matters
The choice between the FTSE 100 and the FTSE 250 ultimately depends on your investment strategy and your outlook on the future of the UK economy and the pound. If you’re risk-averse and looking for more stability, the FTSE 100 might be the way to go. If you’re willing to take on more risk for potential growth and have a long-term horizon, the FTSE 250 could offer more significant rewards.
That being said, there are also alternatives for those keen to stick with GBP and index funds. One might consider the GBP hedged S&P500 to provide some protection against the depreciation of the pound.
In conclusion, it’s crucial to consider your financial goals, risk tolerance, and the economic landscape when deciding which index to invest in. As always, it’s recommended to diversify your investments and regularly review your portfolio in response to changes in market conditions. And remember, investing should always be for the long term. As the old saying goes, “Rome wasn’t built in a day.”