FTSE 250 ETFs: A Basket of Mid-Cap UK Stocks

While FTSE 100 ETFs gives you the titans of the UK economy, the FTSE 250 offers a closer look at companies that are often on a faster growth trajectory. These are firms that have the potential to become the next big thing, making them an exciting, albeit riskier, investment avenue.

You no doubt have good reasons for wanting to drill down and focus on a particular slice of the UK market, rather than opting for a broader ETF that offers better diversification. Who are we to judge? In any case, always be aware of home bias – having too much exposure to your home country – and be sure not to double up on stocks you may have covered elsewhere in your portfolio.

What is the FTSE 250?

The FTSE 250 is often considered the “younger sibling” to the FTSE 100. It comprises companies ranked 101st to 350th by market capitalisation on the London Stock Exchange. Unlike the FTSE 100, which is heavily weighted towards sectors like finance and energy, the FTSE 250 offers a more balanced sectoral exposure, including industries like technology, healthcare, and manufacturing. This makes the index a more diversified – but less stable – representation of the UK’s economic landscape.

Why Invest in FTSE 250 ETFs?

Mid-Cap Diversification

FTSE 250 ETFs offer a unique opportunity to diversify your portfolio. While large-cap stocks provide stability, mid-cap stocks, often represented by the FTSE 250, offer higher growth potential. Including these in your portfolio can provide a balance between risk and reward, and offset any overexposure to the blue chips.

Sector Diversification

The FTSE 250 covers a broader range of sectors compared to the FTSE 100. This is crucial for reducing sector-specific risks. For instance, if you’re heavily invested in tech stocks, the FTSE 250 offers exposure to healthcare, manufacturing, and other sectors, providing a hedge against sectoral downturns.

Cost-Efficiency

FTSE 250 ETFs are generally cost-effective, with expense ratios often below 0.5%. This is significantly lower than most actively managed funds, which can charge upwards of 1%. Don’t underestimate how much fees and charges can destroy wealth over the long term.

Investment Strategy Alignment

If you’re an investor leaning towards growth rather than value, FTSE 250 ETFs align well with your strategy. These ETFs are designed to capture the growth potential of mid-cap companies, which often outperform large-caps in a bullish market.

The Best FTSE 250 ETFs

iShares FTSE 250 UCITS ETF

• Size: £753 million
• Ongoing Fee: 0.4%
• Performance:
  • 3-Years: 11.46%
  • 5-Years: 0.08%
  • 10-Years: 58.34%
• Further Reading

The iShares FTSE 250 ETF is one of the most popular options for investors looking to gain exposure to UK mid-cap stocks. The expense ratio is quite high for a generic index tracker, but a lot lower than you will find offered by an active fund manager.

Vanguard FTSE 250 UCITS ETF

• Size: £1.4 billion
• Ongoing Fee: 0.1%
• Performance:
  • 3-Years: 12.67%
  • 5-Years: 1.17%
  • Since inception (9 years): 50.76%
• Further Reading

Vanguard’s offering stands out for its extremely low expense ratio. If cost-efficiency is a priority (and it really should be), this ETF should be on your radar.

Accumulation vs. Distributing ETFs

Accumulation ETFs

These are ideal for investors who are not looking for immediate income but are focused on long-term capital growth. The dividends are automatically reinvested, contributing to the compounding effect.

Distributing ETFs

If you’re an income-focused investor, perhaps nearing retirement, distributing ETFs could be more suitable. These ETFs pay out dividends, providing a regular income stream.

Example: VMID vs VMIG

The Vanguard FTSE 250 UCITS ETF comes in two different flavours: VMID is the distributing version, paying out the dividends to investors; VMIG is the accumulating option, automatically reinvesting the dividends back into the fund.

Home Bias: An Overlooked Risk for UK Investors

What is Home Bias?

Home bias refers to the tendency of investors to disproportionately allocate their investment capital to domestic assets, often overlooking opportunities in foreign markets. For UK investors, this could mean a portfolio heavily skewed towards UK-based assets, such as FTSE 100 ETFs.

Psychological Factors

• Familiarity: Investors often feel more comfortable investing in companies and markets they are familiar with.
• Perceived Control: The illusion of better control and understanding of local markets can contribute to home bias.
• Information Availability: Easier access to news and updates about local companies can make domestic investments seem more attractive.

Implications for FTSE 100 ETFs

• Overexposure: Investing predominantly in FTSE 100 ETFs can lead to a lack of diversification, exposing you to localised economic risks.
• Missed Opportunities: By focusing solely on domestic assets, you may miss out on potentially lucrative investment opportunities in other markets.
• Currency Risks: A portfolio heavily weighted in GBP assets can expose you to currency risks, especially during times of economic uncertainty in the UK.

How to Mitigate Home Bias

• Global Diversification: Consider allocating the bulk of your portfolio to international assets.
• Asset Allocation: Rebalance your portfolio periodically to ensure a healthy mix of domestic and international assets.
• Consult a Financial Advisor: Seek professional advice to objectively assess your investment strategy and potential home bias.

The UK makes up about 4% of the global market, and a portfolio that is properly diversified geographically should match this. Remember, a lot of your non-investment capital is tied up in your home country – your property, job, business etc – so you are already very exposed to local economic downturns.

Final Thoughts

Capturing the UK mid-cap market is certainly simple with these ETFs. As part of a broader, more diversified portfolio, this could be a worthy option should you think the economic winds are set to turn in the UK’s favour. With a solid core portfolio with global market exposure, a FTSE 250 ETF could be an interesting satellite option in a core and satellite strategy.