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He FTSE 250 It often receives less attention than the flagship. FTSE 100 Index of leading companies.
But both contain several well-known names. The FTSE 250, for example, includes well-known companies such as Burberry (LSE:BRBY), Games workshop, ocado, and ITV.
Could investing in the index be a recipe for success?
Assault on recent performance
Looking back, over the last 12 months, the FSTE 250 has increased in value by 23%. That means that if I had put £20,000 into the index a year ago (for example, through an index tracking fund), my investment should be worth around £24,600 now, excluding any costs raised by the tracking fund.
Not only that, but it would have also reaped dividends. Currently, the FTSE 250 dividend yield is 3.3%. That is equivalent to around £660 annually in dividends with an investment of £20,000.
Now, keep in mind that the dividend yield is a function of what you pay for the shares, as well as the dividend per share. Dividends can go up or down. But, given the much lower level of the FTSE 250 a year ago, if you had invested you would probably have returned more than 3.3% over the past year.
Looking to the future
What's next?
After all, past performance is not necessarily a guide to what will happen in the future.
In the last five years, for example, the FTSE 250 has risen just 4%. That includes the spectacular performance of the last 12 months, which underlines the volatility of the index.
In my opinion, the direction things take from now on depends on the economy in general.
Take Burberry for example. It was previously a component of the FTSE 100, but the fall in the share price (down 60% in the last 12 months) has seen its market capitalization shrink, hence the move to the secondary index.
The reasons for Burberry's share price decline were, to some extent, the result of broader economic forces. A weak economy in key markets has led to a decline in sales for many luxury brands. As a cheaper brand than some high-end rivals, Burberry has seen its sales fall dramatically without having the benefit of a very wealthy customer base that is immune to economic downturns.
Still, I think its brand, large customer base, and extensive distribution network are assets that should see the iconic raincoat maker improve business performance again at some point over the next few years.
However, I'm not sure when that will happen. In my opinion, the type of gains we have seen in the FSTE 250 over the past year reflect an optimistic view of the economic prospects of its member companies.
If that optimism persists, the index could continue to rise. But I see the risk that economic weakness could push the FTSE 250 down in the coming years.
I don't plan to buy an index fund and instead look for great individual stocks in the index that can offer great value right now.
