Getting mid-cap exposure strikes the perfect balance for investors looking for the growth of small caps and the stability of large caps. An equal-weight component can also help mitigate concentration risk to limit volatility — a prime feature in the Invesco S&P MidCap 400 Equal Weight ETF (EWMC).
In times when investors want to amplify their gains in a bull run, small caps have the potential to outperform their large cap counterparts. When in a downtrend, large caps can help mute volatility — mid caps can essentially provide the best of both worlds.
EWMC is based on the S&P MidCap 400® Equal Weight Index. The index itself equally weights mid-cap securities in the S&P MidCap 400® Index.
That equal weighting adds another layer of risk mitigation when investors get mid cap exposure. By allocating equal weight to all holdings, over-concentration in certain stocks can help prevent volatility, particularly during a sell-off.
Furthermore, the fund features over 400 holdings (as of June 16) to further mitigate concentration risk. For a fixed income component, the fund also features a quarterly dividend with the latest 30-day SEC yield coming in at 1.39%.
Historical Outperformance
As mentioned, mid caps offer the perfect balance of small cap performance in a bull market and risk mitigation of large caps in a bear market. An Institutional Investor article called it the “equity sweet spot” with historical data to back it up.
While in recent times, large caps have proven to be the ideal play, mid caps offer a long-term solution for outperformance.
“The Russell Midcap Index has risen 6.9 percent year-to-date, less than half the 14.5 percent gained by the Russell 1000 Index,” the article said. “But despite the recent underperformance, mid-cap stocks have outperformed their mega-cap and small-cap peers over the period from 1979 to 2023, and they have the potential to outperform again over the next few years, according to $6 billion asset manager NFJ Investment Group.”
“The mid-cap space is a fascinating area,” said John Mowrey, chief investment officer at NFJ. “What’s really cool about the mid-cap space is that they have higher returns than the large-caps and grow faster, with lower volatility than the small-cap arena. They’ve often been referred to as a ‘sweet spot,’ because they represent a hybrid of larger-cap stocks with stability and small-cap stocks with growth potential.”
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