If I’d invested £5k in a FTSE 250 index tracker 5 years ago here’s what I’d have today

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At some point a decade or so ago, I bought a FTSE 250 tracker, and did pretty well out of it. I chose it to broaden my exposure to the UK stock market, as I already owned a FTSE 100 tracker. It did the job, cheaply, as trackers are designed to do.

I sold it at some point – I don’t remember the date – when I shifted towards buying direct equities in a bid to generate a superior return.

I don’t regret my decision, but was curious to see how the FTSE 250 had done since I sold my tracker. Having checked, l’m happy I sold. Over the past five years, the index has climbed just 1.22%. If I’d invested £5,000 five years ago, it would have grown to just £5,061.

A tough five years

But my total return would be better than that. The index currently yields 3.4%. If that was my average yield over the five-year term, I’d have generated another £900 or so. So I’d have less than £6,000 in total. Still not great.

The FTSE 250 differs from the FTSE 100 in several respects. The obvious one is that it contains smaller companies, which theoretically have faster growth prospects. This makes its lack of growth particularly disappointing.

Another key difference is that FTSE 250 stocks have much greater exposure to the domestic UK economy. By contrast, FTSE 100 companies generate more than three-quarters of their revenues from overseas activities.

This largely explains why the FTSE 250 has struggled. It’s been a tough five years for the UK stock market, with the pandemic, energy shock, cost-of-living crisis and much else besides. Plus there are the lingering effects of Brexit, which appear to have turned many overseas investors off the UK.

FTSE 100 companies have benefited from their overseas exposure, with the index climbing 9.59% over five years. With a slightly higher yield of around 4%, £5k invested into a FTSE 100 tracker five years ago would be worth around £6,500 or so today.

I favour direct equities over trackers

These performance figures are a little unfair, as they were made worse by the January stock market dip. I’m hoping for brighter times, as analysts reckon inflation could drop below the Bank of England’s 2% target by April. After that, investors will be itching for the first of what they hope will be a string of interest rate cuts that will fire up markets.

Yet I wouldn’t buy a FTSE 250 tracker today. As I said, I prefer to get my stock market exposure through individual companies. A quick glance shows that more than 20 stocks on the FTSE 250 would have more than doubled my money over the same five-year period. Provided I’d had the foresight to buy them, of course.

Buying individual stocks is riskier than tracking an index. Particularly mid-sized stocks, like the ones we find on the FTSE 250. Yet I think the risks are outstripped by the potential rewards. Most of my recent purchases were culled from the FTSE 100. Now I’m planning to up my exposure to FTSE 250 shares, in a bid to generate some serious growth. Just not through a tracker.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.