Mid Caps Married With a Multi-Factor Strategy

By Todd Shriber via Iris.xyz

There is a lingering dichotomy with mid-cap stocks. The asset class is often referred to as the “sweet spot” of the equity market. Simultaneously, mid caps are widely viewed as overlooked.

Another widely held fact about mid caps is these stocks often outperform large caps while delivering less volatility than smaller stocks over long holding periods. Historical data confirm as much. From March 10, 2009, the start of the current U.S. bull market, through Sept. 24, 2018, the S&P MidCap 400 Index returned 428.5 percent compared to 391.8 percent for the S&P 500. The mid-cap benchmark barely trailed the Russell 2000 Index while delivering less annualized volatility and a smaller maximum drawdown than the small-cap index.

Despite those impressive statistics, mid-cap stocks do live up their overlooked billing, a phenomenon seen in the world of exchange traded funds (ETFs). Of the 100 largest US-listed ETFs by assets, just five are mid-cap funds.

A growing number of mid-cap funds offer exposure to multi-factor strategies, which could help lure factor investors to the mid-cap sweet spot. The JPMorgan Diversified Return U.S. Mid Cap Equity ETF (JPME) is one of those funds. JPME’s security selection process focuses on the value, quality and momentum factors.

Assessing The Mid-Cap Premium

Small stocks, including mid caps, often command premiums relative to large caps, a notion confirmed by the 2018 study “The Curious Case of the Mid-Cap Premium.”

“The study confirms the existence of the mid-cap premium and finds that exposures to the size and profitability factors may explain this premium,” notes the study’s author, Wei Ge. “The mid-cap premium may help investors improve portfolio performance without adding significant extra risk, yet investors must fully understand the specific mid-cap index they intend to use to avoid causing distortions to their portfolios.”

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