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Mid Cap ETFs and Stocks

Market Cap Collab with Xander and Basheer

📈 Mid Cap ETFs and Stocks 📈

Make sure to check out @Xander882214 for part 1 (micro and small caps) and @arbitrage for part 3 (large and mega caps). I'll link their posts at the bottom.

What are mid-cap stocks?

Mid-cap (capitalization) is "a term given companies with a market value between $2 billion and $10 billion" (investopedia)

Different ETFs have different qualifications for what they consider a mid-cap stock... so you will see that Vanguard and Russell for example have different holdings in their classifications.

Mid-caps are in the sweet spot of growth and stability.

Mid-caps provide more stability than small caps (market value $300million to $2 Billion) but more growth than large caps (market value over $10 billion). Small-cap companies are usually in a rapid growth cycle, taking on more debt, expanding the company, and have higher upside potential in the long run but may be more volatile. Large-cap companies are generalized as more mature companies with stronger balance sheets and less growth but have more stability.

This is why mid-caps are so underappreciated in my opinion. Mid-caps have a balance of both growth and stability and add more diversification to your portfolio. You can add some upside to your portfolio without taking on as much risk as you would with a small-cap stock.

Why should I add them to my portfolio?

So if you have ever seen any of my trades you will know that I love $VOO, or Vanguard's version of the S&P500. I buy it every Friday, and own other broad market ETF's such as $VTI and $SCHD.

The S&P500 has become the benchmark or performance in the stock market world, because even the top hedge funds cannot beat the S&P500 over an extended period of time.

The only problem with $VOO is that it is heavily weighted towards large caps and mega large caps. So during different times of monetary policy, small and mid caps may outperform large caps.

Adding mid caps to your portfolio can actually boost your portfolio during inflation and for years of economic recovery.

How do mid-caps perform in times of inflation and economic downturn?

Because the market moves in cycles, this answer is complicated. Large caps have dominated in the last decade. Large caps are better positioned financially during a drop, so small caps fall the hardest. In an initial stage of recovery, small caps see a large rebound. But mid caps have a longer-lasting form of rebound.

This is a direct quote from US News: Why You Should Own Midcaps...

"While both small- and mid-cap equities tend to outperform large caps early in the cycle when risk-taking is most rewarded, small caps tend to see their biggest bounce in the initial stage of the rebound," she says. After the early 2000s recession, mid-cap equities outperformed large caps for three consecutive years – 2003 through 2005, Roland says. "Similarly, midcaps performed well after the global financial crisis, beating large caps four out of five years from 2009 through 2013," she says. "After underperforming large caps for the past six years from 2014 to 2020, midcaps may be an overlooked part of the market today"

The chart below shows how different indexes perform at different levels of inflation. Typically, stocks perform best when inflation is between 1-4%. When inflation is above 4.1%, mid caps actually did better than small caps.

Beating the S&P500?

Seeking Alpha published an article called "Mid-Caps: Quietly Beating the Market for 25 Years"

They put out the annual returns for small & mid caps versus the S&P500 since 1992. Studies showed that owning mid caps increased your chances of outperforming the market, but the odds increased the longer you held it.

Every 1 year session since 2000, Small caps had a 37% chance of beating the market, Mid caps 30%, large caps 33%. But the longer you hold, the more and more mid caps have a chance at outperforming. Showing that mid caps serve well for the long term, retirement focused investor.

Another source confirms this: The Power of Mid Caps

How can I invest in mid-caps?

You could add some individual stocks to your portfolio...


just pick an ETF. These are honestly my favorite way to invest in mid-caps because they add the upside without really adding too much risk. $VO follows a similar trendline to $VOO so it will be less growth than an individual stock but more stable like $VOO.

I love mid-cap value ETFs like $VOE as well, because small cap and mid cap value ETFs outperform in a recession. For example, during the "Lost Decade" of 2000-2009... Small cap and mid cap VALUE ETFs crushed it. They have only been neglected in the past decade because growth was doing better than value investing.

Mid-cap ETFs: $VO / $IJH / $SCHM

Mid-cap growth: $VOT

Mid-cap value: $VOE

How are mid-caps performing in 2022?

Actually, you may or not be surprised to know that mid-caps are outperforming the S&P500 this year. I bought $VOO, $VO, and $VOE on January 4th, and these are the performance as of February 9th (market close):

$VOO: -2.57%

$VO: -2.36%

$VOE: -0.85%

You'll notice that the mid-cap value is winning. Yes, all of these funds are negative after a month. Adding small and mid cap ETFs to your portfolio isn't going to 100% save you from volatility. It's not sexy, it's not going to always give you astronomical returns, but it is realistic.

This is why diversification matters. Small caps, mid caps, and large caps all have a place in your portfolio. Don't neglect the middle child 😅

If you found value in this, be sure to check out the other parts in the #MarketCapitalizationCollaboration

part 1 by @Xander882214: Small Cap ETFs and Stocks

Part 2 by @arbitrage: Large Cap ETFs and Stocks

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