Norbert Van Veldhuizen
Lower income has proved no handicap to returns when it comes to the FTSE 250.
Over the last two decades the mid-cap FTSE 250 index has provided a higher return than the FTSE 100, despite a smaller dividend yield.
Since its launch in 1992, the FTSE 250 has become a popular benchmark for portfolio managers seeking to gain exposure to UK mid-cap stocks.
The FTSE 250 also has a distinct, domestic focus by comparison with its sister benchmark, the well-known FTSE 100 index of UK large-cap stocks (the FTSE 100 was launched in 1984 and represents the largest 100 companies with a premium listing on the London Stock Exchange).
In recent years, as much as three-quarters of the earnings of FTSE 100 index constituents has come from non-UK activities, whereas for the FTSE 250 it’s been less, around a half.
The FTSE 100’s higher average weighting in internationally oriented energy and basic materials stocks, many of which pay relatively high dividends, has also translated into greater income for investors tracking the index.
Over the 24 years since 1998, the yield on the FTSE 100 has tended to be between 3 and 6 percent, compared to a 2-4 percent dividend yield range for the FTSE 250 (see the chart).
These are only ranges, of course, and the FTSE 250 yield spiked above 4 percent in 2008 and early 2020. But only for a brief period in the late 1990s—when low- or zero-yielding tech stocks achieved a significant weighting in the FTSE 100 during the dot.com bubble—did the FTSE 250 carry the higher dividend yield of the two popular UK equity indices.
Dividend yields on FTSE 250 and FTSE 100
Source: FTSE Russell, 30/7/99-31/10/2022. Past performance is not a guide to future returns. Please see end for important disclosures
But lower average dividend income has not prevented the FTSE 250 from offering higher returns than the FTSE 100 during the last two-and-a-half decades.
From 1 June 1998 until November this year, the index would have achieved over a 600 percent total return (assuming dividends were reinvested and not taking into account any product-related deductions such as transaction costs and management fees).
FTSE 250 Total Return Index
Source: FTSE Russell, 1/6/98-17/11/2022. Past performance is not a guide to future returns. Please see end for important disclosures
This was more than double the total return on the FTSE 100 over the same period. In other words, the higher capital gains from the UK’s mid-cap segment more than made up for any income disadvantage relative to large-cap stocks.
FTSE 250 TR/FTSE 100 TR
Source: FTSE Russell, 1/6/98-17/11/2022. Past performance is not a guide to future returns. Please see end for important disclosures
The FTSE 250’s higher historic return could also provide empirical evidence of the so-called small- and mid-cap premium. Under the three-factor model set out by Fama and French in 1992[2], smaller companies delivered a have a higher return than large caps, reflecting their greater risk, lower liquidity and more limited analyst coverage.
The FTSE 250 and FTSE 100 are not completely separate entities, of course: the two indices regularly swap constituents as companies’ relative size increases and decreases.
The FTSE 100, FTSE 250 and the FTSE SmallCap index together make up the FTSE All-Share index, which represents 98 percent of the UK equity opportunity set by market capitalisation.
The FTSE All-Share, with its 60+ year history, is still the most widely used UK equity benchmark amongst professional investors.
FTSE UK Indices at a glance - August 2022
| Constituent Gross Market Cap | |||
|---|---|---|---|
| £172bn - £4.55bn | FTSE All-Share® Index 98% of the UK equity gross market cap 598 constituents £2.48tn/£2.30tn gross/net market cap Largest: £172bn/£172bn gross/net market cap Smallest: £34.5m/£10.4m gross/net market cap |
FTSE 350 Index Largest 350 companies in the FTSE All- Share Index £2.41tn/£2.24tn gross/net market cap Largest: £172bn/£172bn gross/net market cap Smallest: £386m/£297m gross/net market cap |
FTSE 100 Largest 100 companies in the FTSE All- Share £2.02tn/£1.90tn gross/net market cap Largest: £172bn/£172bn gross/net market cap Smallest: £2.96bn/£2.16bn gross/net market cap |
| £4.55bn - £719m | FTSE 250 Next 250 largest companies in FTSE All-Share £384bn/£339bn gross/net market cap Largest: £4.55bn/£4.55bn gross/net market cap Smallest: £386m/£297m gross/net market cap |
||
| £719m - £34.5m | FTSE SmallCap Index All-Share constituents that are too small to be included in FTSE 350 228 constituents £73.0bn/£64.7bn gross/net market cap Largest: £719m/£719m gross/net market cap Smallest: £34.5m/£10.4m gross/net market cap |
FTSE 250 Index 15.2% of UK market capitalization |
Put another way, for the top-performing stocks in the FTSE 250, promotion to the large-cap FTSE 100 beckons. For the bottom performers, relegation to the FTSE Small Cap is a prospect.
These changes take place at the regular quarterly reviews of the FTSE UK Equity index series and are widely anticipated by market participants.
As a result, some of the best-performing FTSE 250 constituents from the 1990s have given some of their price returns first to the mid-cap index, then to the FTSE 100.
For example, measured from August 1996 to August 2022, the highest return—2143 percent—of a FTSE 250 constituent subsequently promoted to the FTSE 100 was from speciality chemicals company Croda International.
Croda, which now ranks 42nd by market capitalisation in the FTSE 100, was promoted from the FTSE 250 to the FTSE 100 in 2012.
Some FTSE 250 constituents from the 1990s have gone the other way: the lowest 1996-2022 return of a FTSE 250 constituent subsequently relegated to the FTSE SmallCap index was from industrials company De La Rue, which specialises in banknotes, passports and currency security features.
Over the period, De La Rue shares fell 88 percent. But it wasn’t a steady decline: in the interim, De La Rue even spent some time in the FTSE 100.
Of course, past returns don’t tell us what will happen in the future, and no-one knows what the coming decade will bring.
Could the FTSE 250 once again become higher yielding than the FTSE 100? Could it suffer a period of lower price/earnings multiples after the last decade’s healthy capital gains? Time will tell.
But one thing seems certain: the FTSE 250 will continue to function as a gauge of the health of the UK’s economy, both during periods of optimism and during moments of crisis.
You can find out more about the FTSE 250 by reading our History and Heritage paper.
[1] FTSE Russell calculated that the revenue generated overseas by FTSE 100 index constituents (excluding investment trusts) w periods of optimism and during moments of crisis.as 76 percent in 2015-2017. For the FTSE 250 it was 51 percent over the same period.
[2] “The Cross-Section of Expected Stock Returns”, Journal of Finance, 1992
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