SPDR S&P MidCap 400 sports a five-year annualized return of 8.4%, compared with 5% for SPDR S&P 500 (NYSEArca: SPY) and 7.1% for iShares Russell 2000 (NYSEArca: IWM).
“Mid-cap stocks tend to be more volatile because of narrower economic moats and a greater sensitivity to macroeconomic risks, but with this greater volatility comes a higher beta and the expectation for higher returns,” Morningstar notes in a profile of MDY, the mid-cap ETF.
“While over long periods of time mid-cap stocks tend to outperform, it is unlikely that they will be able to continue to outperform at the same rate as they have over the last decade,” it adds. “Although this asset class should be part of any equities investment allocation, mid-caps’ higher valuations and greater vulnerability to economic conditions are reasons for caution.”
Full disclosure: Tom Lydon’s clients own IWM and SPY.