Should I buy a FTSE 250 index tracker for my ISA?
In April, global stock markets had a meltdown and lots of shares quickly went on sale. I managed to invest in a Nasdaq 100 index tracker at the time, and that has since jumped by 22%. Now, I’m wondering if I should do the same with the FTSE 250.
Why?
The main reason I’ve considered the mid-cap index is because it’s out of favour with investors. Indeed, it was higher at the end of 2019 than it is today!
But if investors reassess many FTSE 250 firms’ prospects at some point, there could be lucrative gains. Especially as there’s also a 3.4% dividend yield on offer.
But why is it struggling to push on? There appear to be a number of reasons for the stagnation. The most obvious is that many of the companies in the index tend to be more domestically focused, making it a better barometer of the UK economy than the global FTSE 100.
Unfortunately, the UK economy hasn’t done very well in recent years. It has faced sluggish GDP growth following both Brexit and the pandemic, and persistently poor productivity is a long-running — perhaps structural — problem.
High inflation is challenging for consumers and businesses, while excessive regulations tend to block meaningful growth (according to the government).
As we know, taxes on individuals and businesses are very high, and there’s mounting pressure on the Chancellor to increase taxes further to balance the books. The Organisation for Economic Co-operation and Development (OECD) recently downgraded the UK’s growth prospects for 2025 and 2026.
Meanwhile, UK energy bills are among the highest in the world, which piles further pressure on British industry and consumers. According to trade organisation Make UK, manufacturers’ energy bills in the UK are 46% higher than the global average.
Finally, the mid-cap index lacks significant technology exposure, to put it mildly. Just 3.94% of it is classified as information technology, versus 51.6% for the Nasdaq 100.
We’re living through a powerful technological revolution, which is only likely to accelerate with advancements in AI. This lack of tech makes me question the FTSE 250’s future growth prospects.
Picking individual stocks
Of course, there will always be lucrative opportunities within the FTSE 250. One of my best-performing UK stocks in recent years has been Warhammer maker Games Workshop, which joined the FTSE 100 last year after a long period of outperformance.
So, rather than invest in an index tracker, I will continue to selectively consider individual mid-cap stocks. One that interests me today is Gamma Communications (LSE: GAMA), which will join the FTSE 250 later this month.
Gamma is a telecoms and cloud services provider focused on business customers in the UK and Europe. It offers voice, data, mobile, and cloud-based communication solutions, with around 90% its revenue recurring.
Last year, revenue increased 11% to £580m, with operating profit jumping 34% to £95.6m. Its UK business now has over 1m active licenses, and has attracted major clients like Morrisons, Equiniti, and the AA.
An economic downturn is a near-term risk here, as this could see businesses pause investments. But as European companies move towards more cloud-based communications solutions, Gamma looks set up for solid growth over the long run.
With the stock trading at just 12.5 times forward earnings, I think it’s worth considering.
The post Should I buy a FTSE 250 index tracker for my ISA? appeared first on The Motley Fool UK.
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Ben McPoland has positions in Games Workshop Group Plc. The Motley Fool UK has recommended Games Workshop Group Plc and Gamma Communications Plc. 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.
