FTSE 350 – How does it compare to other indices?
Whereas nearly everybody I meet has heard of the FTSE 100, the opposite is true of it’s little brother the FTSE 350. I think it just might be the least well known of all the UK indices.
No surprise then that there seems to be a loads of 100, 250 and all share funds available, yet hardly any for the 350.
And to be honest, I can’t really understand it.
After all, the FTSE 350 is the 350 biggest companies listed on the London Stock Exchange (LSE). This is measured by market-capitalization (the price of a companies shares multiplied by the number of shares outstanding).
On paper it sounds like something investors would like to invest in, so why the anonymity.
To understand why, it is worth taking a look at some of the other main indices available in the UK. Though there other index providers, FTSE Russel dominate UK indices.
They provide the six main indices:
FTSE Russel UK Indices
- The FTSE 100
- The FTSE 250
- The FTSE 350
- The FTSE Small-Cap
- The FTSE Fledgling
- The FTSE All-Share
Everybody knows the FTSE 100! In fact it is arguably the most popular and extensively utilized of all the stock market indices in Europe. It contains the biggest 100 companies listed on the London Stock Exchange.
Not quite as famous, but definitely well known to British investors is the FTSE 250. This contains 250 medium sized companies. These companies are the 250 biggest companies listed on the London Stock Exchange after the first 100. In other words, they come after the top 100 i.e. number 101 to number 350.
I hope that makes sense.
As the name implies, the FTSE Small-Cap Index contains small capitalization companies (Number 351 to 600+ on the LSE). Then we have the FTSE Fledgling Index. This tracks really small companies that aren’t big enough to make it into the FTSE Small-Cap Index.
I’ve deliberately left the FTSE 350 and FTSE All-Share until last. And that’s because, these are a little bit different to the others. The other indices focus on one size of company. However, the FTSE 350 and FTSE All-Share diversify across multiple company sizes.
The FTSE 350 combines the FTSE 100 and the FTSE 250 together. Similarly, the FTSE All-Share combines the FTSE 350 with the FTSE Small-Cap.
On the face of it, these two appear to be different because one index contains small companies. However, the way market capitalization works means the bigger companies take up more of the index, and therefore dominate investment performance.
The following table compares the 5 main indices.
FTSE Indices Comparison
You can see that the market capitalization captured by the FTSE 350 and FTSE All-Share are almost identical.
The following graph, compares the results of the returns of some of these indices over the last decade.
This is a graph from FTSE themselves and they haven’t even included the FTSE 350! It is clear that if it was shown, it would sit between the 100 and All-Share.
And here’s the thing. Those two are practically identical anyway. It is pretty clear that the All-Share is heavily dominated by the returns of the 100.
In practice what this means is simple.
Unless you can find a FTSE 350 fund available that is cheaper than an All-Share option there probably isn’t any reason to invest.
It hasn’t escaped my notice that most expats only have access to exchange traded funds (ETFs) and at the time of writing, there aren’t any FTSE 350 ETFs on the market.
If you can invest in standard index funds, there are some available, but in general they aren’t as widely available or as cheap as FTSE All-Share funds.
That’s just to say….
Why bother!
When smaller is better
After seeing that graph, who could blame investors if they rushed out and stuck all their money in a FTSE Fledgling Index fund. Good luck with that though, funds tracking the fledgling index are more or less non-existent. There certainly aren’t any ETFs right now.
Even FTSE Small-Cap Trackers are hard to come by. iShares has one, but it comes with an expense ratio of 0.58%, compared to 0.10% for their FTSE 250 ETF.
When you look at the graph, the returns from the FTSE 250 are so similar to those of the Small-Cap, most investors would probably be better off opting for the 250 which is so much cheaper anyway.
However, before you rush out and stick all your money in a fund that tracks that index it is worth mentioning a few points.
Though, historic data has shown that smaller companies tend to outperform bigger ones in terms of returns, this often comes at a cost in terms of liquidity, costs, volatility and diversification. Let me explain:
- Liquidity = It is more difficult to buy and sell smaller companies. (You might not be able to sell when you want to).
- Costs = It is more expensive to invest in smaller companies.
- Volatility = Smaller companies are more volatile. Their stock prices tend to go up more than bigger companies in the good times, but they tend to go down more than bigger companies in the bad times too.
- Global diversification = Bigger companies tend to spread more of their business across the globe, so they are not as exposed to problems a single country might have.
Though historically over a long time horizon smaller companies have out-performed larger companies, there have been times when they have underperformed. There are also those who suggest that the difference has reduced over time.
Another argument relates to a natural reversion to the mean often talked about by Jack Bogle. Bogle, credited with the first index fund and founder of Vanguard, argues things that out perform over one time period tend to under perform over the next time period: They revert to the mean.
Consequently, if smaller companies have done better over the last 10 years they might underperform over the next 10 years.
The bottom line is nobody knows for sure, so investing in both smaller companies and larger companies is going to be the safest option for most investors.
That brings us back to the FTSE All-Share index. I think it is safe to say that most investors are going to be best served with this index if they want to invest in UK stocks.
DIY Approach
Due to the fact that FTSE 100 and FTSE 250 trackers are often cheaper than All Share trackers, some investors might prefer to invest to go for those simultaneously to save on fees.
How much of each you invest in depends on you. However, the market has already decided how much of each is optimum based on market-capitalization.
Unless you want to digress from what the multi-trillion dollar financial market thinks you should divide between the two indexes in the same proportions as the FTSE 350. Right now that is about 20% of your money in the FTSE 250 and 80% in the FTSE 100.
If you don’t do that, you are going against the market and that’s a big call. You are essentially going against what all those hedge fund wizards and heavily resourced giant pension funds think.
Having said that, many investors won’t do this for various reasons. Three of which, I find compelling.
- Commissions – Every time you buy a fund, you have to pay a commission. Your perfect split may end up costing you more in commissions.
- Hassle – If the amount of money you invest doesn’t end in lots of zeros, anything but a 50/50 split is going to need a calculator and there is an argument that the most successful investors are the ones who have an easy system set up. They just invest automatically without having to think about it.
- Diversification (away from the FTSE 100) – As we’ve already seen, the100 dominates the 350 and All-share. The greater you allocate to the 250 the less dominant the FTSE 100 becomes.
For the above reasons I’ve seen investors with anything from 20% to 100% of their funds in the FTSE 250 and all with justification.
At the end of the day it is going to come down to what is most important to you, but just remember, if you are allocating more than about 20% of your FTSE 100/250 split to the latter you are moving away from the correct market capitalization and in doing so you are basically betting against the multi-trillion dollar markets.
