Entering 2023, there was ample enthusiasm among experts and market observers that smaller stocks, including mid-caps, could outperform large-cap rivals. The S&P MidCap 400 Index is up 8.7% year-to-date — an advantage of 200 basis points over the large-cap S&P 500. Investors looking to get in on the often overlooked mid-cap act have an array of exchange traded funds to consider, including the American Century Mid Cap Growth Impact ETF (MID).
MID, which turns three years old in July, isn’t a run-of-the-mill mid-cap ETF. The actively managed fund attempts to beat the Russell Midcap Growth Index, focusing on companies with quality traits that also score well on environmental, social, and governance (ESG) metrics.
That might be a compelling combination in any environment, but should the U.S. economy weaken, that could be an opportunity for investors to embrace MID.
“Looking at annual total return from 2009, mid caps similarly outperformed over four out of the five years after the global financial crisis. Not only did they also perform well compared to the small-cap segment post-recession, but the cumulative returns from the start of 2000 through December 2022 show the Russell Midcap Index far outpaced the large-cap Russell 1000 Index with returns of 598% versus 334%,” noted Dina Ting, head of global index portfolio management at Franklin Templeton.
Mid-cap stocks have other benefits, even in a risk-off. As was seen last year, the strong dollar pinched a variety of large-cap companies because those firms generate significant portions of their revenue overseas. Like small-caps, mid-caps are more domestically focused, meaning they aren’t as vulnerable to currency fluctuations.
“Another added benefit of this sometimes-forgotten segment is diversification. Mid caps tend to be less impacted by currency fluctuations and global downturns than large caps, which often include major corporations and multinationals that operate around the world,” added Ting.
For its part, MID’s emphasis on mid-caps that score well on U.N. Sustainable Development Goals criteria could set investors up for long-term success. The fund’s ESG overlay could help investors steer clear of ESG controversies and implies a favorable level of quality.
“Beyond the market-cap criteria, we believe that multifactor strategies can potentially deliver enhanced diversification with higher risk-adjusted returns and lower volatility than traditional market cap-based indexing. In our view, a forward-looking, rules-based index design that analyzes individual stock exposure against a well-vetted blend of factors—quality, value, momentum and low volatility—helps provide exposure to high-quality companies at a reasonable price while avoiding value trap,” concluded Ting.
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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.