When looking at equity market exposure, investors may find that large-cap stocks are too big for rapid growth and small-caps may expose them to more volatile short-term moves, but middle capitalization stocks and related exchange traded funds may be just right.
Middle capitalization stocks, or 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.
Over the long haul, mid-cap stocks have historically outperformed their large-cap peers and wit.
To gauge how much investors should be allocated toward mid-caps, middle capitalization stocks make up about 18% of total stock market index funds and account for 20% of the U.S. equity universe, according to Morningstar data.
Related: An ETF Twist for Traditional Mid-Cap Exposure
Investors interested in mid-cap focused ETFs have a number of options to choose from, including the iShares Core S&P Mid-Cap ETF (NYSEArca: IJH), the largest offering in the space. IJH tries to reflect the performance of the S&P MidCap 400 Index and comes with a 0.15% expense ratio.
Alternatively, the SPDR Mid-Cap 400 (NYSEArca: MDY) covers the same mid-cap index. However, due to the older unit investment trust structure, the ETF is less flexible than Regulated Investment Company fund structures found in most other ETFs, like IJH. Consequently, MDY can not lend shares or efficiently reinvest dividends. MDY also issues a costlier a 0.25% expense ratio.
The Vanguard Mid-Cap ETF (NYSEArca: VO) tries to reflect the performance of the CRSP US Mid Cap Index. CRSP’s weighting methodology differs from the S&P. Consequently, the average market for a stock in the underlying index is $9 billion, which is less than the $62 billion in the S&P 500 and a little more than the $4 billion for the S&P 400. VO comes with a cheap 0.10% expense ratio.
Additionally, investors interested in a smart-beta offering can look at factor-based or rules-based index ETFs, like the First Trust Mid Cap Core AlphaDEX Fund (NYSEArca: FNX) or the Oppenheimer Mid Cap Revenue ETF (NYSEArca: RWK).
Related: Dividend ETFs for a Stubbornly Low-Yield Environment
FNX selects stocks from the S&P 400 Index, but chooses stocks based on growth factors, sales to price and one year sales growth, along with value factors like book value to price, cash flow to price and return on assets. Consequently, the ETF leans toward more small-cap names. FNX has a 0.66% expense ratio.
RWK selects components from the broad basket of S&P MidCap 400 stocks but reweights holdings based on each company’s revenue, producing a portfolio that could potentially provide a better representation of companies’ economic contribution to the benchmark index. When comparing RWK to the benchmark S&P MidCap 400, the revenue-weighted ETF takes a greater tilt toward small-capitalization stocks and leans toward the value category. The ETF has a 0.39% expense ratio.
For more information on middle capitalization stocks, visit our mid-cap category.