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The FTSE 250 often gets less attention than the flagship FTSE 100 index of leading companies.
But both contain a number of household 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 potentially be a recipe for success?
Storming recent performance
Looking back over the past 12 months, the FSTE 250 has increased in value by 23%. That means that if I had put £20,000 into the index one year ago (for example, via an index tracker fund) my investment ought to be worth around £24,600 now, excluding any costs levied by the tracker fund.
Not only that, but I would have earned dividends too. Currently the FTSE 250 dividend yield is 3.3%. That amounts to around £660 annually in dividends on a £20,000 investment.
Now, bear in mind that a dividend yield is a function of what one pays for shares as well as the dividend per share. Dividends can move up – or down. But, given the much lower level of the FTSE 250 a year ago, if I had invested then I would likely have earned a higher yield than 3.3% over the past year.
Looking to the future
What next?
After all, past performance is not necessarily a guide to what will happen in the future.
Over the past five years, for example, the FTSE 250 has risen only 4%. That includes the storming performance of the past 12 months, underlining the volatility of the index.
Where things go from here depends on the broader economy, in my view.
Take Burberry as an example. It was formerly a constituent of the FTSE 100, but a tumbling share price (down 60% in the past 12 months) has seen its market capitalisation shrink, hence the movement to the secondary index.
The reasons for the Burberry share price crash were to some extent the result of wider economic forces. A weak economy in key markets has led to shrinking sales for many luxury brands. As a brand that is cheaper than some high-end rivals, Burberry has seen sales fall dramatically without having the benefit of a very affluent customer base that is immune to economic slowdowns.
Still, I think its brand, large customer base, and extensive distribution network are all assets that ought to see the iconic raincoat maker improve business performance again at some point over the next few years.
As to when that will happen, though, I am uncertain. The sort of gains we have seen in the FSTE 250 over the past year reflect an optimistic view of the economic prospects for its member companies, in my opinion.
It that optimism remains, the index could keep moving up. But I see a risk that economic weakness could push the FTSE 250 level down in the next several years.
I am not planning to buy an index fund and am instead looking for great individual shares in the index that might offer great value right now.
