The cheapest way to buy high-flying FTSE 250 index

The difference in charges for FTSE 250 tracking ETFs is quite wide. 

The UK’s FTSE 250 index hit a new all-time high on 7 April, closing past the 22,000 point mark for the first time in its history.

The index is composed of the 250 largest stocks after those included in the FTSE 100. As a result, the FTSE 250 is seen as giving ‘mid cap’ exposure. This also means that the FTSE 250 has a relative high exposure to domestic-facing UK stocks.

Around 70% of the revenue of FTSE 100 companies comes from global sales, leaving just 30% coming from domestic. In contrast, the FTSE 250 revenue is split about 50/50 between UK and global sales. As a result, its performance is more closely tied to that of the UK economy and is seen as a way to access UK economic growth.

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This explains why the index has performed well lately and been able to reach a new all-time high. Investors are increasingly optimistic about the prospects for the UK economy due to the success of the UK’s vaccine roll-out allowing the UK economy to start opening back up. Notably, the International Monetary Fund recently said it expected the UK’s economic growth to be over 5% both this year and next.

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Another headwind removed from the UK economy has been the avoidance of a no-deal Brexit. The consensus view among investors was that the worst-case scenario for the UK economy would have been the UK leaving the European Union without a trade deal. With the conclusion of a deal at the end of 2020, that risk has now lifted.

So what’s the cheapest way to access the FTSE 250?

As you might expect, ETFs provide the cheapest options. The cheapest ETF tracking the FTSE 250 is the Vanguard FTSE 250 UCITS ETF (LSE:VMID), with an ongoing charge of just 0.1%. Put differently, that’s 10 basis points, or one tenth of 1%. That works out at £1 in fees for every £1,000 invested. That’s not quite as low as some FTSE 100 or S&P 500 ETFs, but it is still very cheap.

The second cheapest is the Invesco FTSE 250 ETF (LSE:S250), with a slightly higher ongoing charge of 0.12%. However, it should be remembered that just 2 basis points is quite minuscule, and investors are not likely to notice much difference in returns between the two.

Slightly pricier is the Xtrackers FTSE 250 ETF (LSE:XMCX), for 0.15%. Again, investors are unlikely to notice much difference and this ETF can still be classified as within the realms of ‘cheap’ or ‘good value.’

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However, not all FTSE 250 tracking ETFs are so cheap - investors should ensure they aren’t buying something with needlessly steep fees. For example, the HSBC FTSE 250 ETF (LSE:HMCX) charges 0.35%. That’s cheaper than most active funds, but compared to the above-mentioned three ETFs it is relatively steep. Even worse, however, is the iShares FTSE 250 ETF (LSE:MIDD), which charges 0.4%. This is the most expensive FTSE 250 ETF available.

Index funds also track the FTSE 250. On the interactive investor platform, the HSBC FTSE 250 Index is available, which has a fee of just 0.12%, much lower than HSBC’s ETF equivalent.