Embracing Mid-Cap Investing With ETFs | ETF Trends

An increasing number of data points and research confirm that investors should not gloss over mid-cap stocks and consider the asset class along with related exchange traded funds, such as the SPDR Mid-Cap 400 (NYSEArca: MDY).

MDY tracks the widely followed S&P MidCap 400 Index. Over a long-term horizon, though, mid-caps have outshined the competition. Since 1996, the S&P MidCap 400 generated an average annual return of 10.4%, compared to 7.3% for the S&P 500 and 9.7% for the SmallCap 600.

“The S&P MidCap 400 is designed to measure the performance of mid-sized U.S. equities, reflecting this market segment’s distinctive risk/return characteristics,” said S&P Dow Jones Indices in a recent note. “S&P Dow Jones Indices defines mid-cap companies as those with total market capitalizations between USD 2.4 billion and USD 8.2 billion.”

Mid-cap stocks and funds are often overlooked relative to large- and small-cap equivalents. Historical data confirm that should not be the case because mid caps typically outperform larger stocks while delivering less volatility than smaller stocks.

More Mid-Cap Advantages

“Many mid-cap companies may possess a strategic advantage relative to firms of larger or smaller sizes, having successfully navigated the challenges specific to small companies, such as raising initial capital and managing early growth, and now offering stability with the potential of additional growth opportunities,” said S&P Dow Jones.

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, along with providing more stable stock prices. Additionally, they are not so big that their size would slow down growth. Increased mergers and acquisitions activity could be just what mid-caps need to catch up to large- and small-cap stocks.

“Mid-cap companies have generally overcome the risks of small-cap companies, but they still have the potential to grow before exhibiting the growth deceleration often seen in large-caps,” according to S&P Dow Jones. “Mid-caps often have established infrastructure, access to capital, and developed distribution systems, but they are still nimble with motivated management teams to take advantage of opportunities quickly.”

The mid-cap category has also outperformed their larger 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.

For more information on middle capitalization stocks, visit our mid-cap category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.