Investors may target middle capitalization stocks through exchange traded funds to capture attractive risk-adjusted returns.
“Sometimes referred to as the market’s sweet spot, mid-cap stocks are positioned in a way that gives them the potential to achieve impressive risk-adjusted returns,” writes Karen Wallace, senior editor with Morningstar.
Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow and provide more stable stock prices. Additionally, they are not so big that their size would slow down growth. [Interested in the U.S.? Look to ETFs that Target Smaller Companies.]
Looking at Morningstar data, the mid-cap asset category has generated an average annualized 8.7% return over the past 15 years with a 17.5 standard deviation, a measure of historical volatility. Meanwhile, over the past 15 years, large-caps generated an average 3.8% return with a 14.9 standard deviation and small-caps returned 8.9% with a 19.8 standard deviation.
“You can see that mid-caps have outperformed their large-cap peers, but with lower volatility than small caps,” Wallace added. “In fact, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.”
To get a sense of how much investors should be allocated toward mid-caps, middle capitalization stocks make up about 18% of total stock market index funds and account for 20% of the U.S. equity universe, according to Morningstar data.
Investors interested in mid-cap focused ETFs can take a look at a number of options, including the iShares Core S&P Mid-Cap ETF (NYSEArca: IJH), the largest offering in the space. IJH tries to reflect the performance of the S&P MidCap 400 Index and comes with a 0.15% expense ratio. The ETF is down 1.6% year-to-date.