Smaller stocks are thriving and their mid cap compatriots are joining in. Investors can tap into that trend while limiting single stock risk with the Invesco S&P MidCap 400 Equal Weight ETF (NYSEARCA: EWMC).
EWMC, which is just over a decade old, tracks the S&P MidCap 400 Equal Weight Index. Mid caps and equally-weight strategies are increasingly important at a time when a small number of stocks dominate many large cap benchmarks.
“An important implication is that the S&P 400 and 600 index returns are less reliant on a handful of names, and may therefore be an effective tool for diversifying US equity exposure,” according to S&P Dow Jones Indices.
Examining EWMC: Why Mid Caps Make Sense
Mid cap companies are slightly more diversified than their small cap peers, which allows many to generate more consistent revenue and cash flow, along with more stable stock prices. Many are not so big that their size slows down growth.
“Looking at very long term time periods, small and mid-size indexes have demonstrated superior performance when compared to large-cap only. 25 years of data show an outperformance of 186 basis points per year (S&P 400) and 99 basis points per year (S&P 600) compared to the S&P 500,” notes S&P Dow Jones.
As investors look over their equity market exposure, investors may find that large cap stock positions are too big for rapid growth and small caps expose them to more volatile short-term moves. Middle capitalization stocks, sometimes referred to as the market’s sweet spot, can help investors achieve improved risk-adjusted returns.
“The S&P 400 and 600 have historically had a higher correlation to a number of economic indicators (GDP growth, investment and consumption growth). As the re-opening becomes more broad-based, if consistent with such higher correlations, these indexes may provide a higher beta, leading to outperformance versus the S&P 500,” according to S&P Dow Jones.
EWMC is also worth considering as cyclical and economically sensitive sectors come back into style. The ETF allocates over 62% of its weight to financial services, industrial, consumer discretionary, and technology stocks.
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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.
