Middle-capitalization stocks and exchange traded funds have attracted greater interest over the years with their better risk-adjusted returns. Following the market’s recent tumble, mid-caps are falling out of favor, but that could be opening the door to opportunity with select ETFs.
Mid-caps also have a higher debt-to-capital ratio and are less profitable than large-cap stocks, which make middle-capitalization companies more volatile and more sensitive to business cycles.
Earlier this year, the rotation into mid-caps was fueled by perceived currency risks that large-caps are exposed to – large multi-national U.S. corporations may see revenue streams diminish as overseas currencies continue to depreciate against the U.S. dollar. [Strong U.S. Dollar Could Pressure S&P 500 Earnings, ETFs]
As the U.S. dollar continues to strengthen against foreign currencies, large-cap companies with overseas revenue streams could see profits diminish. [Strong U.S. Dollar Could Pressure S&P 500 Earnings, ETFs]
If the USD should continue to appreciate, it will diminish the value of company revenues generated in weaker overseas currencies and makes U.S. exports more expensive to foreign buyers. On the other hand, mid- and small-cap companies tend to be U.S. focused and are more closely tided to the well being of the U.S. economy. With the U.S. economy on the rise and low energy prices fueling growth, smaller company stocks could continue to outperform.