Mid-cap exchange traded funds (ETFs) just might be the Goldilocks investment – not too big, not too small, but just right.
Mid-caps have a tendency to get lost in the shuffle. After all, they’re not the in-your-face global behemoths that large-caps tend to be. They’re also not the hot new company full of promise, but just starting out. Still, there are reasons to consider their attributes in your clients’ portfolios.
What Are Mid-Caps?
Mid-caps include companies with market capitalization ranging from $2 billion to $10 billion, though the definition of “mid-cap” varies by index provider. Growth-type companies, with stronger revenue and earnings, dominate this asset class.
Mid-caps have less risk and lower volatility than small-caps, making them appealing in tough and uncertain economic times. That said, they also can be appealing for the risk-averse investor looking for slightly more growth than can be expected from firmly established large-cap corporations. Some say that they’re the best of both worlds, combining the potential for growth that smaller companies have with the financial standing of a large company.
During a more subdued recovery, mid-caps may be in a better position to adapt. Like small-caps, their smaller size makes them nimble Research has shown that mid-caps tend to outperform as they capitalize on the assets of their smaller ailing competitors as an economy improves.
Furthermore, mid-cap stocks have historically provided better returns than large-cap companies in the long run.
There is also the potential for reward in mid-cap investing, since such companies often find themselves ideal for acquisition by larger corporations, giving investors the opportunity for further reward.
Mid-Cap ETFs
Mid-cap ETFs generally are intended to add diversification to a broader large-cap portfolio.
Mid-cap ETFs come with three distinct indexing approaches: including traditional market-cap weighting, fundamental weighting based on earnings or dividends, and rules-based “quant” investing, which includes stocks based on P/E ratios or other quantitative measurements. In addition, leveraged and short mid-cap ETFs offer bets against the index or to add additional exposure to an index.
Traditional mid-cap ETFs are cheap and liquid, which makes them ideal for short-term traders and long-term investors alike. Potential investors should note the differences in composition and methodology in traditional index ETFs and the newer, exotic ETFs.
The biggest benefit to mid-cap ETFs might be that they save investors a lot of homework. Not all mid-cap companies are household names, which means that you could spend days digging up research on all of them. ETF providers do the legwork for you so that you get full exposure in one simple ETF.