Smaller equities are following their large-cap counterparts lower this year, perhaps giving investors reason to overlook mid-cap stocks. However, that may be the wrong course of action.
While mid-cap stocks have histories of being glossed over by investors, this year’s downdraft in the group could be opening the door to opportunities with exchange traded funds such as the IQ U.S. Mid Cap R&D Leaders ETF (MRND).
MRND, which came to market in February, follows the IQ U.S. Mid Cap R&D Leaders Index. That gauge is a departure from old guard mid-cap indexes because it focuses on companies that are notable spenders on research and development. That point of emphasis for MRND’s index is something to ponder because it could be beneficial when paired with mid-caps.
“On the other hand, compared to many small-caps, they are much more of a known quantity. That can make them less subject to dramatic price drops if their quarterly financial performance doesn’t quite meet expectations. Of course, since mid-caps are well-known and well-along in their business, they’re much less likely to double or triple in value like an up-and-comer might,” according to Business Insider.
MRND’s focus on companies emphasizing research and development implies a growth feel, and that is indeed the case, as the fund devotes 35.3% of its weight to technology stocks. The healthcare and consumer discretionary sectors combine for 41.5% of the MRND portfolio. In the mid-cap space, many healthcare names are classified as growth stocks.
While the woes of growth stocks — regardless of market capitalization — this year are well documented, MRND’s sector allocations could be beneficial over the long term because those are areas in which larger companies could go shopping for deals.
“Mid-caps are also more likely than small-caps to be the subject of a merger or acquisition. They’re often the sort of revenue-rich enterprise a conglomerate would love to add to its stable, to quickly gain presence in a field or boost its bottom line,” added Business Insider.
The Russell Mid-Cap Growth Index is down almost 30% year-to-date. In theory, that makes it easy to be dismissive of a fund like MRND. However, reality could prove different, indicating that risk-tolerant, long-term investors may find MRND to be an appropriate avenue for mid-cap exposure.
“Sitting between small- and large-caps in terms of both risk and potential return, they are well-suited to investors who are comfortable taking on a moderate degree of risk with the chance for substantial gains,” concluded Business Insider.
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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.