FTSE 100 versus FTSE 250 trackers

The Budget is just around the corner, putting the UK economy firmly back in the spotlight.

The FTSE 100 and FTSE 250 are both well-known UK stock market indices, but they offer exposure to different types of companies.

If you're positive on the prospects for the UK economy, the FTSE 250 can offer more direct exposure. But if you're more cautious, the FTSE 100's global businesses mean that its performance isn't as closely tied to what happens at home.

Here we look at the differences and how investors can get exposure using index tracker funds.

This article isn’t personal advice. All investments can rise and fall in value, so you could get back less than you invest, and past performance isn’t a guide to the future. If you're not sure whether a course of action is right for you, ask for financial advice.

FTSE 100 versus FTSE 250 - what's the difference?

The FTSE 100 contains 100 of the largest companies listed in the UK. But don’t mistake it for a pure bet on the UK economy.

Many of the UK’s biggest companies are global businesses that generate a significant proportion of their revenues overseas.

That means that the performance of the FTSE 100 can be influenced as much by what's happening abroad as what's happening here in the UK. Currency movements matter, too, as overseas earnings are converted back into pounds.

The FTSE 250, on the other hand, has more of a domestic flavour. It contains the next 250 largest companies after those in the FTSE 100 and generally has greater exposure to the UK economy. That can make it a more direct way to express a view on the UK's prospects.

Feeling positive about the UK?

If you're optimistic about the outlook for the UK economy, then a FTSE 250 tracker could be worth considering.

Medium-sized businesses tend to earn more of their revenue close to home, making them more sensitive to changes in domestic economic conditions.

Stronger economic growth and improving consumer confidence could provide a more supportive backdrop for these businesses. But the reverse is also true. Weaker consumer spending or higher interest rates could weigh more heavily on domestically focused businesses.

More cautious on the UK?

Investors who are more cautious about the domestic outlook shouldn't necessarily write off UK-listed companies altogether.

The FTSE 100's global businesses mean that it's less dependent on the strength of the UK economy. A company might be listed here but sell its products and services around the world.

And weakness in the UK doesn't necessarily mean weakness for FTSE 100 companies. But international exposure brings different risks, with global economic conditions, currencies and overseas markets playing a much bigger role.

Why some investors hold both

Index funds are a useful way for investors to gain exposure to a specific part of the market. But you don’t necessarily have to choose between the FTSE 100 and FTSE 250.

The FTSE 100 and FTSE 250 can complement each other. Holding both provides exposure to the UK's largest global businesses alongside medium-sized companies with greater sensitivity to the domestic economy. You can achieve that through a single broader UK tracker, giving exposure to both within a single fund.

Whichever approach investors choose, investment decisions should be based on their long-term objectives.

Three index funds that provide exposure to UK companies

Investing in index tracker funds is a simple and low-cost way to track the performance of a benchmark, rather than try to beat it like active funds do.

Investing in these funds won’t be right for everyone, though. Investors should invest only if a fund matches their objectives, they understand its risks and charges, and it forms part of a diversified portfolio.

For more detail on each fund, its charges and specific risks, please see the links to their factsheets and key investor information.

All the funds below participate in securities lending, where some of their investments are lent to other providers in exchange for a fee, which adds risk.