Motley Fool once described large-cap equity investing as “swimming with the sharks,” comparing what it said is Wall-Street-analyst infested waters to the “deserted lagoon” that’s small-cap investing—a space where Wall Street pros are harder to find, and everyday investors stand a much better chance at finding “nearly limitless” rewards.
It’s a colorful description. There’s no question that the large versus small-cap comparisons have long captured investors’ imagination. But often lost in this conversation is the overlooked middle-child: midcaps.
Midcap stocks—those falling somewhere between $2 billion and $10 billion in market capitalization—rarely make headlines. And yet, like small-caps, midcaps too have been having quite a stellar year, even if with little fanfare.
Earlier this summer, U.S. small-cap stocks hit new highs—after a weak start to the year—due to what’s seen as favorable tax policy, strong momentum in U.S. economic growth, and even some dollar strength, according to Tushar Yadava, iShares investment strategist.
Small-caps have been stars since February, but midcaps aren’t that far behind.
Source: BlackRock; data from Bloomberg as of 7/10/18
“The S&P Mid-cap index outperformed its large-cap cousin by 0.5% year-to-date and by roughly 4% since February lows,” Yadava said. “Midcap shares have beaten large-caps for the same reasons that small-cap outperformed other styles.
“Midcap’s exposure and sensitivity to U.S growth fall somewhere in between small and large-cap indexes,” he said. “They have benefited from strong domestic economic growth, tax reforms, and limited international exposure, but not to the same degree that small-cap securities have enjoyed.”
Today, there are more than $182 billion invested in U.S. midcap ETFs, the biggest funds including the iShares Core S&P Mid-Cap ETF (IJH) with $48 billion in assets; the Vanguard Mid-Cap ETF (VO), which tracks a CRSP index, has $24 billion in assets and a dirt cheap price tag of 0.05%; the $21 billion SPDR S&P Midcap 400 ETF Trust (MDY), tied to an S&P Dow Jones index, and the $18 billion iShares Russell Mid-Cap ETF (IWR), offering investors access to the 800 smallest companies in the Russell 1000.
Chars courtesy of StockCharts.com
The performance of these leading-in-assets ETFs isn’t all that different, but there’s significant disparity in returns within the segment tied to various methodology differences in ETFs.