FIVE weeks ago, the FTSE 100 index marched over the 6,000 mark. This was not exactly a cue for wild celebration, but it was a cheering signpost on the way back to 7,000, which was nearly reached at the very end of 1999, the height of the dot-com boom.

This week, however, the FTSE 250 index, which comprises the second rank of quoted companies, breached 10,000. That was the latest in a succession of peaks over the past few months. Shortly before the bubble burst, the 250 index did edge up through 7,000. It regained that level a year ago but was still measuring 7,500 in October before a dramatic spurt pushed up average prices by a third in the space of six months.

Looking back, you might not guess that both indices started at the same time, two decades ago, at the same base of 1,000. From the beginning until the end of the bear market three years ago, the 100 and the 250 indices tootled along near enough to each other to recall a motorway and the A road it replaced. Since then, the 250 index has gained 135 per cent and the 100 index a little more than 50 per cent.

We cannot say that the FTSE 250 is beating the FTSE 100 because they are only indices. They have no life beyond being a base for financial derivatives. But it shows that most top companies have, on average, yielded nothing like as good a return as those below.

For big institutional investors, anything below the top flight can be only a minor speciality. The total value of the 250 companies is about £260 billion, against the £1,500 billion capitalisation of the top 100 shares. The 250 are scarcely worth more than the £250 billion value of the top two: BP and HSBC.

For private investors, however, a £1 billion company is as good as a £10 billion or £100 billion one. The difference is that smaller issues, though not minnows, carry more risk for greater potential return.

The risks have generally paid off since October, but the stark divergence since then has not reflected divergent profits or dividends, even though the second-rankers include more cyclical industrial companies and are geared more closely to the UK economy. It is the ratings that have grown apart. Since October, the average price-to-earnings (p/e) ratio on FTSE 100 stocks has fallen from 15 to close to 13, but the average p/e ratio for FTSE 250 companies has climbed from 18 to 21.5.

Unless you are selective, the second level is not a rich pool for dividend income, whether you plough it back in an Isa or use it to pay the gas bill. Only three companies yield as much as Lloyds TSB’s 6.5 per cent and they look nothing like as safe. A dozen yield 5 per cent, but the average yield is only 2.2 per cent, against 3.05 per cent for the FTSE 100. The idea that neglected second-tier stocks assure you a better income no longer holds.

The top five 250 stocks give some idea of why they have become pricier. Vedanta, Lonmin and Drax are all in the mining and energy sector. Lonmin has been stalked while the London Stock Exchange is the subject of an auction exposing its irreplaceable value. ICAP, the financial broker and trader, is also sought-after. Not far below are Mitchells & Butlers, Associated British Ports and Pilkingtons, all of which have been stalked (and in the last case, won) by bidders, as well as genuine growth stocks such as Carphone Warehouse.

The 250 still offers more variety and is, to that extent, more representative of British business. The top 15 include three financial groups, two miners, two energy companies, two pub owners, two business service groups, a telecoms operator, housebuilder, engineer and a property company.

All but two of the FTSE 100’s top 15 are banks, oil and mining companies or pharmaceuticals groups. Yet these 15 account for 60 per cent of the market value of the top 100. The more important question is which set of companies is the odd one out and which offers the fairer valuation of UK business, the benchmark against which individual share ratings should be judged.

The closer you look, the more it seems that the top 100 are most out of step. Big liquid stocks have borne most of the £1 billion-a-month selling by pension funds, only recently fully countered by the rash of foreign takeovers. But the main reason is that key sectors have strikingly low ratings.

The most logical of these are the oil and gas companies, one fifth of the index, which trade near to ten times latest earnings. Analysts know that price-inflated profits in this cyclical industry must come back as oil prices fall, or even if prices merely stop rising. Maybe, but it does seem possible that the oil sector will be more like housebuilding shares, anticipating a downturn that keeps being put off.

There is less sense in the low ratings of banks, which make up another fifth of the FTSE 100. They traditionally had low p/e ratios because of an accident-prone past. But is 12 times 2005 earnings too cautious for a sector that analysts expect to raise profits by about 8 per cent this year and next? Banks also offer dividend yields averaging 4 per cent, with good prospects for higher payouts in many cases.

After a poor year, telecoms groups — shrunk to about 7 per cent of the top 100 after recent takeovers — are trading at about 12 times last year’s earnings and yield an average of 4 per cent. But profits should edge up this year and grow a bit in 2007. More attractively, there is scope for top companies to raise dividends.

Nearly half the market value of the FTSE 100 is therefore in unusually low-rated sectors. These offer some good value but suggest that the benchmark for mainstream businesses is probably nearer 16 times earnings, with a yield of, say, 2.7 per cent, which just fits Tesco, this week’s best blue chip. Some constituents of the FTSE 250 still look fevered. Not every company will be taken over by foreigners.

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