The FTSE 100 and FTSE 250 are very different beasts. Whereas the former is truly global, with around 80% of revenue sourced from overseas, the mid-cap index has more businesses reliant on the domestic economy.
That’s construction firms, housebuilders, high-street consumer brands, pub chains, and so on. As such, the FTSE 250 serves as a better barometer for the UK economy than the blue-chip index.
So it seems fitting to ask how the FTSE 250 has got on under Sir Keir Starmer. Would someone have made money?
Solid returns?
The short answer is yes. When he entered Downing Street in July 2024, the FTSE 250 was at 20,761. On Monday (20 July), when the removal vans rolled in, it was at 23,591. A positive change of 13.6%.
That’s not bad, but it’s far lower than the FTSE 100 (around 28%) and the S&P 500 (roughly 33%).
That said, the FTSE 250 actually sports a higher average dividend yield than the FTSE 100, so we need to factor income in too. Adding in dividends, the total return rises to around 21%.
Therefore, a £10k investment would now be worth about £12,100. That’s a solid return, albeit only half the tech-heavy Nasdaq-100 has delivered.
Popping the bonnet
Sadly, the headline performance is less flattering than it first appears. That’s because there were two drivers that had very little to do with domestic economic strength.
One has been acquisitions, which have sent some share prices up 30%-60% in a day. Yesterday, for instance, outsourcer Mitie agreed to a £3.1bn takeover and rocketed almost 40%. Others include Tate & Lyle, Rotork, and easyJet.
Unfortunately, these solid businesses were trading at cheap valuations due to a lack of investor interest in the FTSE 250. This points to a hollowing out of the London Stock Exchange (very few new IPOs) and perpetually low economic growth.
Second, more than a third of the entire index is made up of investment trusts, many of which are global. For example, Allianz Technology Trust, which is packed with US tech stocks, is up 71% since July 2024.
Might Burnham be a boost for the FTSE 250?
We now have Andy Burnham as PM. If he can fire up the UK economy, then the Vanguard FTSE 250 ETF (LSE:VMIG) should do well moving forward and could be one to consider.
This index tracker is an accumulating one, meaning dividends are reinvested back into the ETF. Its prospects could improve if economic growth picks up, driven by more construction (reindustrialisation) and an easing of the cost of living.
These are two priorities of Burnham’s government, with an immediate announcement that VAT will be cut from household electricity bills. Other cost of living policies are being drawn up, which could boost disposable incomes and therefore retailers.
While still early days, it’s worth noting that the VAT cut will save the typical household just £45 a year. That’s small beer compared to the massive rise in food, energy, and general living costs over recent years.
Meanwhile, we’re yet to hear how reindustrialisation will work under existing net zero targets. After years of decarbonising via deindustrialising, reversing won’t be popular with some groups and politicians. So I’m sceptical about this.
Personally, I’m avoiding FTSE 250 ETFs in favour of global firms not reliant on domestic growth or policies.
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Ben McPoland has no position in any of the companies mentioned.
