Maybe. Depending on the selection of indexes, fund products, and time periods, you can find almost anything you want. Data mining issues aside, the notion of what’s often called the “sweet spot” in the capitalization spectrum persists, albeit in fits and starts. A popular explanation is that the middle slice of the capitalization spectrum merges the best attributes of small caps and large caps while minimizing the drawbacks. The implication: you should carve out a dedicated mid-cap allocation. Perhaps, but like every other risk premium the mid-cap variety waxes and wanes.
In the search for the mid-cap edge Professor Ken French’s database is an obvious place to start. These numbers certainly favor mid caps vs. large caps through time. Over the last half century, mid-caps beat large caps by a sizable margin in annualized performance terms—12.1% vs. 9.6% through this past August. Over the last decade, however, the spread has narrowed—9.8% vs. 8.1%. Is that a clue that the secret’s out and expected return for mid caps will be lower?
Meantime, how does the mid-cap premium compare by way of real-world investing? In search of an answer, let’s crunch the numbers on a set of ETFs:
One way to measure premia is by calculating the daily return spread between two assets and tracking the cumulative change. By that standard, the small- and mid-cap ETFs have earned a moderate premium over large-cap equities. Micro-caps, by contrast, have trailed large-caps and by more than a trivial degree.