Market Overview

Minding The Middle With A Popular Mid-Cap ETF

Minding The Middle With A Popular Mid-Cap ETF

Mid-cap stocks and the corresponding exchange traded funds are often overlooked in favor of large- and small-caps, but ample research and data points suggest investors should take closer looks at mid-cap equities and funds.

The SPDR S&P MIDCAP 400 ETF (NYSE: MDY) is one of the oldest and largest mid-cap ETFs on the market. MDY, which debuted in 1995 and now has $19.21 billion in assets under management, tracks the widely followed S&P MidCap 400 Index. MDY holds 400 stocks with a weighted average market capitalization of $5.77 billion.

“Of the universe of 2,862 publicly listed US stocks, the chart below shows that 46 percent have market capitalizations between $1 billion and $12 billion — qualifying them as mid-caps,” said State Street Global Advisors in a recent note. “Investors who allocate only to large- and small-caps will lack pure beta exposure to the largest segment of U.S. firms.”

An Important Presence

With mid-caps accounting for more than 46 percent of all public companies listed in the U.S., that means this market segment is 700 basis points more prominent than large-caps and has more than triple the listings of smaller stocks. Additionally, mid-caps historically outperform large-caps while delivering significantly less volatility than small-caps.

“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 SSgA. “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.”

MDY devotes nearly 18 percent of its weight to both the technology and financial services sectors. None of the ETF's 400 holdings account for more than 0.75 percent of its weight.

Consistent Outperformance

Historical data suggest that when the S&P 500 rises, mid-caps typically deliver better returns. Additionally, mid-caps perform better than large-caps when the S&P 500 falters.

"Since 1997, in months where the S&P 500 Index posted a positive return, mid-caps have outperformed large-caps 64 percent of the time and small-caps 51 percent of time,” said SSgA. “Conversely, in months where the S&P 500 declined, mid-caps outperformed small-caps 57 percent of the time. This highlights mid-caps’ ability to generate higher absolute returns while potentially reducing downside risk relative to small-caps.”

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