Ftse 250 index: Meaning, Criticisms & Real-World Uses

What Is FTSE 250 Index?

The FTSE 250 Index is a prominent stock market index that represents the performance of medium-sized companies listed on the London Stock Exchange. As part of the broader equity index category, the FTSE 250 comprises the 101st to the 350th largest companies by market capitalization in the United Kingdom. It serves as a key benchmark for the UK's domestic economy, offering investors exposure to established, yet often more growth-oriented, businesses than those found in the UK's largest index. The FTSE 250 is managed by FTSE Russell, a subsidiary of the London Stock Exchange Group.⁵⁵, ⁵⁶, ⁵⁷

History and Origin

The FTSE 250 Index was launched on October 12, 1992, by FTSE Russell, a joint venture between the Financial Times and the London Stock Exchange. Its creation aimed to provide a dedicated measure for the UK's mid-cap segment, complementing the established FTSE 100 Index which tracks the largest UK companies. The index began with a base value of 2,403 and a market capitalization of £98 billion. ⁵³, ⁵⁴This initiative was part of a broader effort to offer a comprehensive suite of indices reflecting the entire spectrum of the UK equity market, including the FTSE All-Share Index which combines the FTSE 100, FTSE 250, and FTSE SmallCap indices. ⁵²The distinct focus of the FTSE 250 on domestically oriented businesses has made it a significant indicator of the health of the British economy since its inception.
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Key Takeaways

The FTSE 250 Index tracks the performance of the 101st to 350th largest UK-listed companies by market capitalization.
⁴⁸, ⁴⁹* It is a capitalisation-weighted index, meaning larger companies have a greater influence on its value.
⁴⁶, ⁴⁷* The FTSE 250 is often considered a better barometer of the domestic UK economy compared to the FTSE 100, as its constituents tend to have a higher proportion of their revenues from within the UK.
⁴⁴, ⁴⁵* The index's composition is reviewed quarterly, with companies added or removed based on their market capitalization and other eligibility criteria.
⁴³* Historically, the FTSE 250 has shown higher volatility but also the potential for higher returns, especially during periods of strong economic growth.
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Formula and Calculation

The FTSE 250 Index is a capitalisation-weighted index. This means that the influence of each company on the index's overall value is proportional to its market capitalization, adjusted for its free float. The index value is calculated in real-time and updated frequently during trading hours.
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The general formula for a capitalization-weighted index like the FTSE 250 is:

\text{Index Value} = \frac{\sum (\text{Price}_i \times \text{Shares Outstanding}_i \times \text{Free Float Factor}_i)}{\text{Divisor}}

Where:

(\text{Price}_i) = Current share price of company i
(\text{Shares Outstanding}_i) = Total number of shares issued by company i
(\text{Free Float Factor}_i) = Percentage of shares readily available for trading (not held by insiders or restricted)
(\text{Divisor}) = A numerical value used to maintain the continuity of the index value despite corporate actions such as stock splits, dividends, or changes in index constituents.

The sum in the numerator represents the aggregate free-float adjusted market capitalization of all constituent companies. The divisor is adjusted to ensure that the index value does not change due to non-market-related events.
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Interpreting the FTSE 250 Index

Interpreting the FTSE 250 Index involves understanding its role as a proxy for the health of the UK's domestic economy. Unlike the FTSE 100, whose constituents often derive a significant portion of their earnings from international operations, FTSE 250 companies tend to be more focused on the British market. ³⁶, ³⁷Therefore, movements in the FTSE 250 can provide insights into consumer spending, business confidence, and overall economic activity within the UK. ³⁵A rising FTSE 250 generally indicates a robust domestic economy, while a decline may suggest economic challenges. ³⁴Investors often use the index's performance to gauge the impact of UK-specific economic policies and events on mid-sized businesses, which can be more sensitive to local conditions than large multinational corporations. ³³Furthermore, the FTSE 250's sector composition is generally more diversified across sectors like industrials, real estate, and consumer services, making it a broader representation of various UK industries.
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Hypothetical Example

Imagine an investor named Sarah who believes the UK domestic economy is poised for strong growth in the coming year. She might look to invest in a fund that tracks the FTSE 250 Index to capitalize on this outlook. Suppose the FTSE 250 Index is currently at 20,000 points. If the UK economy experiences a period of strong consumer spending and increased business investment, many of the mid-cap companies within the FTSE 250 could see their revenues and profits rise.

For instance, a hypothetical retail chain listed on the FTSE 250 might report higher sales, leading to an increase in its share price. Similarly, a UK-focused construction company in the index could benefit from infrastructure projects. As these individual companies perform well, their increased market capitalization contributes positively to the overall index value. If the FTSE 250 rises to 22,000 points over the year, Sarah's investment in a tracking fund would reflect this 10% gain, demonstrating how the index's movement can mirror the performance of its constituent companies in a specific economic environment.

Practical Applications

The FTSE 250 Index has several practical applications across the financial landscape:

Benchmarking Investment Funds: Fund managers who specialize in UK mid-cap equities frequently use the FTSE 250 as a benchmark to measure their portfolio's performance. This allows investors to assess how well a fund is doing relative to the broader mid-cap market.
³¹* Creating Exchange-Traded Funds (ETFs) and Derivatives: The FTSE 250 serves as the underlying asset for various investment products, including ETFs and derivatives like futures and options. These products enable investors to gain exposure to the index's performance without directly owning all its constituent stocks. The Intercontinental Exchange (ICE) offers futures and options on the FTSE 250 Index, facilitating hedging and speculative strategies.
²⁹, ³⁰* Economic Indicator: Due to its significant exposure to the UK domestic economy, the FTSE 250 is widely regarded as a barometer for the country's economic health. Its movements can provide insights into consumer confidence, business investment, and overall economic trends, complementing the more globally-focused FTSE 100.
²⁷, ²⁸* Portfolio Diversification: Investors can use the FTSE 250 as a component within a broader portfolio diversification strategy to gain specific exposure to the UK's mid-sized growth companies, which may offer different risk-return characteristics than large-cap or international holdings.
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Limitations and Criticisms

Despite its utility, the FTSE 250 Index has certain limitations and has faced criticisms. One key point is its higher volatility compared to the FTSE 100. As mid-cap companies are generally smaller and often more sensitive to domestic economic changes and market sentiment, their share prices can exhibit greater fluctuations. ²⁴, ²⁵This increased volatility means that while there's potential for higher returns in a growing economy, there's also an elevated risk of larger drawdowns.
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Another common observation relates to its domestic focus. While often seen as a strength for gauging the UK economy, this can also be a limitation for investors seeking broader international exposure. While FTSE 250 companies do have some overseas earnings, their reliance on the UK market is significantly higher than that of FTSE 100 constituents. ²⁰, ²¹This means the FTSE 250's performance can be more heavily influenced by UK-specific economic and political events, potentially leading to underperformance if the domestic economy faces headwinds. For instance, some analyses suggest that a strong domestic focus contributed to the FTSE 250's relative underperformance compared to the FTSE 100 during periods of UK economic sluggishness.
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Furthermore, like all indices, the FTSE 250 is subject to index reconstitution effects. Quarterly reviews lead to companies being added or removed, which can cause temporary price distortions as passive investment funds adjust their holdings. ¹⁸While these effects are generally short-lived, they can create trading opportunities and risks around review dates.

FTSE 250 Index vs. FTSE 100 Index

The FTSE 250 Index and the FTSE 100 Index are both crucial benchmarks for the UK stock market, but they represent different segments and possess distinct characteristics.

Feature	FTSE 250 Index	FTSE 100 Index
Constituents	Comprises the 101st to 350th largest UK-listed companies by market capitalization.	Comprises the 100 largest UK-listed companies by market capitalization.
Market Segment	Represents mid-cap companies.	Represents large-cap or "blue-chip" companies.
Domestic Focus	Generally more exposed to the UK domestic economy, with a larger proportion of revenues from within the UK. ¹⁶, ¹⁷	More globally oriented, with a significant portion of revenues derived from international operations. ¹⁴, ¹⁵
Volatility	Typically exhibits higher volatility due to the smaller size and domestic sensitivity of its constituents. ¹³	Generally less volatile due to the larger size and global diversification of its constituents. ¹²
Growth Potential	Can offer higher growth potential, especially during periods of strong domestic economic expansion. ¹¹	Often preferred for stability and consistent dividend yield. ¹⁰

While the FTSE 100 is often seen as a reflection of global economic trends given its multinational constituents, the FTSE 250 provides a more direct pulse on the UK's internal economic health. Investors often confuse the two, but their differing compositions mean they offer distinct exposure and risk profiles within the UK equity market.
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FAQs

What type of companies are in the FTSE 250 Index?

The FTSE 250 Index consists of mid-sized companies listed on the London Stock Exchange, specifically those ranked from the 101st to the 350th largest by market capitalization. These companies often have a significant focus on the UK domestic economy.
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How often is the FTSE 250 Index reviewed?

The FTSE 250 Index's constituents are reviewed quarterly, typically in March, June, September, and December. During these reviews, companies may be added or removed based on their updated market capitalization and adherence to eligibility criteria set by FTSE Russell.
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Can I invest directly in the FTSE 250 Index?

No, you cannot directly invest in the FTSE 250 Index itself. However, investors can gain exposure to its performance through various financial products, such as exchange-traded funds (ETFs) or index investment funds that aim to replicate the index's performance. You can also invest in individual companies that are part of the FTSE 250.
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What does the performance of the FTSE 250 Index indicate?

The performance of the FTSE 250 Index is often seen as a strong indicator of the UK's domestic economic health. Because many of its constituent companies generate a larger portion of their revenues within the UK compared to those in the FTSE 100, its movements can reflect trends in local consumer spending, business investment, and overall economic sentiment in the United Kingdom.
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Is the FTSE 250 more volatile than the FTSE 100?

Generally, yes, the FTSE 250 Index tends to be more volatile than the FTSE 100. This is primarily because mid-cap companies, by their nature, can be more susceptible to economic shifts and market sentiment. While this can lead to greater price swings, it also implies potential for higher returns, especially during periods of robust economic growth.¹