How to invest in the FTSE 250 from the US

• Learn about the FTSE 250, a UK stock market index of 250 major companies.
• Find out how to invest in FTSE ETFs, index funds, and shares.
• Compare FTSE 250 online brokers and set up your first order.
• Get the pros and cons of investing in the FTSE 250.

If you’re interested in investing, you’ve probably heard of the FTSE 100 (the ‘Footsie’), a UK stock market index of the 100 largest companies (measured by market capitalization) listed on the London Stock Exchange (LSE). But you may not be aware that there is also a FTSE 250 index, which covers the LSE’s 101st to 350th largest companies.

The value of the index is calculated in real-time, and it is updated every minute.

By choosing the FTSE 250 you can avoid the more predictable blue-chip household names of the FTSE 100 and invest instead in some smaller companies with perhaps more potential for growth (although, as always, there are no guarantees that this will happen).

So, if this sounds like the type of investment you’re looking for, you’ll need to know about the types of FTSE 250 investments available to you, which online share brokers you can use, and the pros and cons you should be aware of when investing from the USA.

The FTSE 250 is just an index, one of the barometers used to indicate the state of the market in general. It’s not a company, so you can’t buy shares in the index itself. Instead, you can invest in exchange traded funds (ETFs), or index funds, or shares of individual companies featured in the FTSE 250.

Exchange Traded Funds

ETFs are investments that pool cash created by selling units in the fund, and invest it in a basket of securities – such as shares, fixed interest bonds and commodities. Each ETF aims to track a particular market index, industry, commodity or investment strategy.

ETF units can be bought and sold on the stock market in the same way as company shares. The unit prices change constantly during the trading day, but generally show less fluctuation than individual company share prices. This makes them a way of spreading risk. Because they are less risky than individual shares, an investment in ETFs is less likely to record significant losses or gains in the short term. Investing in ETFs is a strategy for long-term investors.

Actively managed ETFs which may invest FTSE 250 companies – but do not exactly track the FTSE 250 – include:

• Invesco FTSE RAFI UK 100 UCITS ETF (LON: PSRU)
• Amundi Prime UK Mid & Small Cap UCITS ETF (LON: PRUK)
• Lyxor Core UK Equity All Cap (DR) UCITS ETF – Dist (LON: LCUK)

Index funds

An index fund is a type of ETF which aims to exactly mirror the performance of a market index by investing in all the shares in the index in the same proportion as the index, usually weighted by market capitalization. This means that it is a passive fund, unlike actively managed ETFs which may not follow the index exactly.

Passive funds will usually have lower management fees than actively managed ETFs.

Examples of FTSE 250 index funds:

• Vanguard FTSE 250 UCITS ETF (LON: VMID)
• Lyxor FTSE 250 UCITS ETF (LON: L250)
• iShares FTSE 250 UCITS ETF (LON: MIDD)
• Invesco FTSE 250 UCITS ETF (LON: S250)

Individual company shares

Another way to invest in the FTSE 250 is to select several of the companies included in the index and invest in them directly.

It would be too time-consuming and expensive to attempt to invest in all of them, but the list includes many well-known names – even though they’re not in the top 100 listed companies. They include Aston Martin Lagonda (LON: AML), Britvic (LON: BVIC), CMC Markets (LON: CMCX), Currys (LON: CURY), Domino’s Pizza (LON: DOM), Dr. Martens (LON: DOCS), IG Group Holdings (LON: IGG), ITV (LON: ITV), Marks & Spencer Group (LON MKS), Royal Mail (LON: RMG), Tate & Lyle (LON: TATE), Virgin Money UK (LON: VMUK), and J D Wetherspoon (LON: JDW).

However, the fact that FTSE 250 companies are mostly large and well-known does not protect you from the increased risk of investing in individual shares, because the success of your investments depends on the fortunes of just a few companies rather than a diversified fund.

Step 1: Choose a broker

There are hundreds of online share trading platforms to choose from. When comparing options, check their brokerage, cash withdrawal and activity fee amounts, and the tradable securities offered (which should include ETFs and shares).

Whichever broker you choose must have access to the LSE. For the sake of having all your investment activity in one place, you may also want access to US and European share markets from the same broker.

Some brokers offer commission-free trades on ETFs. If you’ve decided to invest in shares, look for a broker offering fractional shares since many FTSE 250 companies have high prices for a single share.

Step 2: Decide how much to invest

Only ever invest what you can afford to lose because share markets are volatile.

If you can’t withstand losses in the short term, it’s best to wait until you can, or plan to invest for the long term only.

Step 3: Transfer funds to your account

Add funds to your trading account with a bank transfer, the most commonly accepted method.

It may take some time for funds to clear before you can start trading. Note that your broker may require a minimum deposit amount.

Step 4: Choose between shares, ETFs, and index funds (or a combination of them)

ETFs and index funds are diversified across a range of companies, so they typically experience lower price volatility than individual company shares and can be better for long-term investment.

• Short-term investors hoping for quick capital gains (but also prepared for losses) may prefer to buy shares.
• ETFs can often be traded commission-free.
• Index funds mirror the market, so their value rises and falls in line with the broader market.

Step 5: Configure your order

Depending on the broker you use, you can choose from many different kinds of order.

A market price order is the most straightforward, requiring virtually no setup. Once executed, you’ll get shares at the next available market price for the share or fund unit.

You’ll need more options regarding order configuration if you have a specific strategy. Some brokers have highly customizable orders that can be triggered by events, meaning you can buy or sell when your chosen share or fund hits a price target.

Step 6: Place your order

When you’re happy with all of your decisions, submit your order to be executed.

Step 7: Monitor your investment

Share investment should not be a set-and-forget activity. Even if you intend to invest for the long term, you need to keep an eye on the company or fund's performance and price movements.