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A Surprising Group Was Less Volatile Than Large Caps in November

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A Surprising Group Was Less Volatile Than Large Caps in November
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Among the three major market capitalization segments – large, mid and small – large caps are usually the least volatile. That wasn't the case in November as the S&P MidCap 400 Index was less volatile than the large-cap S&P 500.

Historically, mid-cap stocks outperform large caps, but do so with more risk.

What Happened

The iShares Core S&P Mid-Cap ETF (NYSE: IJH), the largest mid-cap exchange traded fund tracks the S&P MidCap 400. IJH's three-year standard deviation is 11.78 percent, well above the 9.39 percent on the iShares Core S&P 500 ETF (NYSE: IVV).

“While the S&P MidCap 400 risk of 19.1% and S&P SmallCap 600 risk of 21.8% were also elevated ending Nov. 30, 2018, it is interesting to note the large-cap risk was higher than the mid-cap risk,” said S&P Dow Jones Indices in a recent note. “The last November when this happened occurred in 2007.”

As of Dec. 3, IJH was up 1 percent year-to-date, trailing IVV and the S&P SmallCap 600 Index, but the mid-cap has been less volatile than the S&P 500 and the S&P SmallCap 600 this year. IJH's maximum drawdown this year is also smaller than the S&P 500's.

Why It's Important

While mid caps can outperform large caps, consistently harnessing that theme without a buy-and-hold strategy can be difficult.

“Going back to 1991, when the S&P MidCap 400 was launched, it has delivered on average 3.2% extra of annualized return but at a cost of higher 1.4% annualized risk, based on daily data from Jan. 2, 1991 – Nov. 30, 2018.  It seems attractive to have earned that premium but it is not available consistently,” said S&P. “Note, over many commonly measured periods, mid-caps underperform large-caps.  Though, in November, mid-caps outperformed.”

Historical data also indicate that mid-cap stocks perform less poorly than large caps when markets decline. For every 1 percent the S&P 500 declines, the S&P MidCap 400 usually responds with a loss of 0.97 percent, according to S&P data.

What's Next

One reason IJH was sturdy last month was lack of exposure to the energy sector, the worst-performing mid-cap sector in November. IJH allocates just 4.51 percent of its weight to energy stocks, lower than all but two sectors represented in the fund.

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