Investors are hearing plenty about how large-cap stocks are outpacing their smaller peers this year, but some mid-cap exchange traded funds are still delivering impressive returns. For example, the Vanguard Mid-Cap Growth ETF (NYSEArca: VOT) is up 10% year-to-date and hit a record high Wednesday.
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.
The mid-caps segment has also outperformed their large-cap peers, but with lower volatility than small caps. Moreover, 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.
VOT tracks the CRSP US Mid Cap Growth Index and holds nearly 160 stocks. The ETF allocates nearly a quarter of its weight to industrial stocks with financial services and technology names combining for about 36% of the fund’s roster. At the end of March, VOT’s top 10 holdings combined for just 14.1% of the ETF’s weight, according to Vanguard data.
These sector by sector plays may become increasingly important as we head toward a rising rate environment. VOT’s sector lineup clearly tilts toward cyclical groups and cyclical sectors often perform well in the face of higher interest rates.
“Mid-cap stocks have been in the sweet spot with respect to their risk-adjusted performance since 1926,” said Morningstar. “Although they have historically had a higher return than large caps, they have also had a higher volatility and a higher beta, or more procyclical movement with the market. But the higher return has compensated investors for taking this increased risk.”
Value stocks typically trade at cheaper prices relative to fundamental measures of value, such as earnings and the book value of assets. In contrast, growth stocks tend to run at higher valuations since investors expect the rapid growth in those company measures.
Investors are typically more aggressive during periods of heightened volatility and would chase popular growth stocks. Since growth stocks show high multiples, investors may expect that the companies will sustain a high growth rate.
As is the case with many Vanguard ETF, VOT carries a low fee. The ETF charges just 0.07% per year, or $7 on a $10,000 investment. That makes it cheaper than 94% of rival funds, according to Vanguard.
For more information on mid-caps, visit our mid-cap category.