The year 2026 has seen the FTSE 100, the Dax, and the S&P 500 reaching record highs. Mid-cap indices are also performing well, with the Russell 2000 and FTSE 250 nearing previous peaks and the MDAX surpassing the 30,000 mark.
Momentum and high-quality value stocks are propelling mid-cap performance. The S&P 500’s momentum is largely driven by the tech sector, with Sandisk soaring by 72% and the semiconductor sector up 25%. This highlights the concentration risk in US blue-chip stocks.
Diverse Performers in Mid Cap Indices
In contrast, the Russell 2000 features diverse top performers across sectors like basic materials, energy, and telecoms. Erasca leads in performance, providing resilience against tech market fluctuations. Commodity price volatility poses a challenge, with the FTSE 100 buoyed by miners and defense firms.
The FTSE 250, domestically focused, presents diversified performers like Ocado and Oxford Biomedica. It’s less exposed to global risks, with 45-55% of its revenue from the UK, compared to the FTSE 100’s 25-30%. This positions the FTSE 250 to potentially benefit from the UK’s positive economic growth, indicated by November’s surprise growth figures.
Given the record highs in major indices, we see the current rally as fragile and overly concentrated. The top 10 stocks in the S&P 500 now make up over 34% of the index’s weight, a level of concentration we have not seen since the dot-com era of the late 1990s. This suggests considering pairs trades, such as going long Russell 2000 futures while shorting Nasdaq 100 futures, to hedge against a specific downturn in the AI trade.
An options-based approach could involve buying call options on mid-cap ETFs like IWM to capture further upside from their broadening momentum. To protect against the tech concentration risk, traders could simultaneously purchase put options on a tech-heavy index ETF like QQQ. With the VIX volatility index currently trading near a multi-month low of 13.5, using options to express this view is relatively inexpensive right now.
Advantages of Domestic Focus
In the UK, the FTSE 250’s domestic focus presents a clear advantage over the FTSE 100, which is exposed to volatile commodity prices and global geopolitical tensions. Given that the latest data showed the UK economy grew by 0.2% in November 2025, beating expectations, this domestic focus is a powerful tailwind. This reinforces the case for a more localised strategy.
To act on this, traders could look at long positions in FTSE 250 futures contracts while shorting FTSE 100 futures. This strategy isolates the potential outperformance of the domestic UK economy from the risks facing the large multinational mining and energy companies that dominate the senior index. It is a direct play on the UK’s nascent economic recovery.
We saw this rotation into smaller companies begin late last year, as the Russell 2000 gained over 12% in the final quarter of 2025 while the S&P 500’s gains were almost entirely from a handful of names. To capitalize on this continuing momentum, selling put spreads on mid-cap indices could be a way to generate income while maintaining a bullish bias. This strategy benefits from both a rising market and the passage of time.
