Is the FTSE 100 better than the FTSE 250 – what do they offer investors?

From record FTSE 100 highs to rampant rumours around UK IPOs, like Raspberry Pi, Shein and Boots, we think the UK stock market is getting its mojo back. But, it’s not all just about the big names – after all, the UK stock market isn’t created equal.

There’s a big and little Britain at play in the form of the FTSE 100 and smaller companies, like in the FTSE 250 and beyond.

But is one better than the other for investors?

This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Remember, past performance isn’t a guide to the future and ratios also shouldn’t be looked at on their own.

Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

FTSE 100 – what does it give investors?

The FTSE 100 is home to the UK’s 100 biggest companies. It’s heavily weighted towards sectors like oil & gas, pharmaceuticals, financial services and industrials.

BP, AstraZeneca and HSBC are just some of the well-known faces housed in London. But just because a company is listed in the UK doesn’t mean its fortunes rely on British activity.

Lots of the FTSE 100 big hitters make the bulk of their money overseas. That means they’re more affected by changes in currency movements and geopolitics.

It’s important to understand where a company makes its money rather than making assumptions, before investing. That can help make sure you’re not overly exposed to one area.

FTSE 250 – what about smaller companies?

The FTSE 250, which is simply the next 250 biggest UK companies, is quite a bit different to the FTSE 100.

FTSE 250 stocks are more focused on domestic activity than the FTSE 100 – it’s more closely linked to the UK’s economy, and the ups and downs that entails, which means international exposure is reduced.

That’s neither good nor bad, but rather something to keep in mind.

So, is one better than the other?

In short – no.

Over the last decade, you can see below how different indices have performed. The main thing to keep in mind is that the FTSE 250 has seen a bumpier ride, which reflects the more volatile nature of smaller companies and the UK economy.

The FTSE 100 on the other hand has been smoother, albeit less high-octane.

We can see that AIM stocks have had the most difficult time overall. AIM is the Alternative Investment Market, which houses much smaller and growing companies. While there can be diamonds in the rough, these investments are also much higher risk.

Is the FTSE 100 or 250 better for income?

A cornerstone of the UK market is its dividends. The yield on offer on this side of the Atlantic is higher than other regions.

The dividend yield on the FTSE 100 is about 3.6%, and 3.8% for the FTSE 250. But not all companies make payouts to their shareholders, and remember yields are variable and no dividend is ever guaranteed.

Looking at a company’s ability to pay dividends is an important thing to consider, especially for UK stocks. But this shouldn’t be the only reason you decide to invest in a company.

Basics are best

When it comes to working out if the FTSE 100 or FTSE 250 is best, the answer is neither. Rather, it’s important to remember the basics.

That means not choosing to invest in a company because of whether it’s large or mid-sized, but because you understand the differences between the two. Not making assumptions about UK companies being exposed to the same things is an important distinction to make.

Some of the fundamental things to consider – but this is by no means an exhaustive list – include if the company has a proven track record of profit and generating cash flow, as well as its exposure to different areas of the global economy, and whether this fits with your diversification goals.