Mid-cap stocks and exchange traded funds, such as the SPDR Mid-Cap 400 (NYSEArca: MDY), can go often go overlooked relative to large- and small-cap fare, but this market cap segment has a history of delivering stellar long-term returns.
“Of the universe of 2,862 publicly listed US stocks, 46% have market capitalizations between $1 billion and $12 billion—qualifying them as mid caps. Investors who allocate only to large and small caps will lack pure beta exposure to the largest segment of US firms,” said State Street in a recent note.
The $19.2 billion MDY, which is one of the largest mid-cap ETF, tracks the S&P MidCap 400 Index and holds 400 stocks with market values ranging from $1 billion to $4.5 billion.
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.
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.
“Mid-cap stocks, as represented by the S&P MidCap 400 Index, have delivered higher annualized returns than their large- and small-cap peers over the past 20 years,” said State Street. “What’s more, these returns were achieved with reduced volatility relative to small caps. This has resulted in mid-cap stocks delivering the highest risk-adjusted returns over this period.”
Middle capitalization stocks, sometimes referred to as the market’s sweet spot, could help investors achieve improved risk-adjusted returns. 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.
“Since mid-cap firms are established entities, this historically higher earnings growth has been accomplished with decreased reliance on debt relative to small-cap firms,” said State Street. “Over this same period (2000-2017), when considering short- and long-term liabilities, mid-cap firms have increased their total debt by 3.3 times while small caps have seen their debt levels increase by 4.5 times.”
For more information on mid-caps, visit our mid-cap category.