The middle child of the stock market, mid caps, is leading the pack this year.
The S&P MidCap 400 Index is up 19 percent year to date, while the S&P 500 Index has gained 18 percent and the S&P SmallCap 600 Index is up 16 percent.
Mid-cap exchange-traded funds generally invest in companies with market caps ranging between $2 billion to $10 billion. This market-cap size sometimes gets overlooked as investors usually default to owning large-cap companies or seek small caps for their growth potential. Yet other investors like mid caps for a combination of safety and growth—less risky than small caps and better growth outlook than large caps.
Kristina Hooper, chief global market strategist at Invesco, says because mid caps straddle between large and small caps, they’re like Goldilocks from the children’s story in that they’re not too hot, not too cold.
“Right now, I think they’re particularly relevant because investors are worried about a global growth slow down,” Hooper says. “That drives them to domestic-oriented stocks.”
Most investors may gravitate to small-cap stocks when thinking about the sector with the greatest domestic exposure, but Hooper says mid caps also have a strong domestic orientation, and investors can get that without the general volatility of small caps.
Sometimes investors don’t care about the balance of growth and stability that mid caps offer, but now may be different. “I think where we are [in the economic cycle] and the greater nervousness since last year on the part of investors is driving them to mid caps,” Hooper says.
Investors may have mid-cap exposure without realizing it, she says, as some funds that aren’t specifically labeled as mid caps hold mid-sized companies. But it’s not often that investors specifically seek out mid-cap exposure.
That might be a mistake. Both Hooper and S&P Indices say mid caps can outperform large and small caps. A research note from S&P Indices shows that the S&P Midcap 400 mostly outperformed the S&P 500 and the S&P SmallCap 600 between 1994 and 2014.
“With the exception of the period from July 1991 to March 2000, when the performance spread was negligible, the S&P MidCap 400 has outperformed the S&P 500 in periods with contrasting market regimes, i.e., in both weak and strong markets,” S&P Indices said in a research note.