2 ETFs To Add U.S. Mid-Cap Stock Diversity To Any Portfolio

 | Oct 13, 2020 09:36AM ET

Long-term equity portfolios typically diversify across sectors and regions, as well as market capitalization (cap). Understanding the characteristics of these categories is important as they have different risk/return profiles and could behave differently depending on market conditions.

We previously discussed an exchange traded fund (ETF) that tracks small-cap stocks. Today, we'll focus on mid-caps and take a closer look at two funds.

h2 The Case For Mid-Caps/h2

In the US, mid-cap stocks are typically considered to be those firms with a market cap between $2 billion and $10 billion. However, differences in definition may exist among brokers. Similarly, some ETFs that describe themselves as “mid-cap” could include companies whose market-cap is larger than $10 billion. Historically, ceilings for each cap category have gone up.

Market value affects expectations about a company’s future. Mid-cap stocks have grown large enough to graduate from the small-cap realm. Thus their operations are more established and possibly less risky. However, if the economic contraction continues longer than expected, mid-caps may have a harder time weathering the storm than large-caps.

Nonetheless, they are still small and possibly flexible enough to continue growing into a larger cap business. For instance, a company with a market valuation of $7 billion is likely to double in value more quickly than a company with a market cap of $70 billion.

The “mergers and acquisitions” (M&A) theme tends to be significant for mid-cap companies. Management could decide to buy a smaller company or merge with a comparable or even larger business. Such an approach might become both a blessing and a curse for a mid-cap company and its investors. Significantly, large-caps tend to acquire mid-caps, a move that usually creates value for shareholders.

Academic research and most financial planners tend to agree, a diversified portfolio that includes companies with various market caps could help reduce risk and volatility. As such, investment returns are likely to be higher over the long haul.

Mid-cap companies in general do not have as much analyst coverage as large businesses. This leaves room for quite a number of them to stay below the radar. Investors willing to put time into research are likely to find mid-cap firms with a promising future.

Alternatively, they may do due diligence on a range of funds that specialize in mid-cap stocks. Here are two that may be of interest:

h2 1. SPDR S&P MIDCAP 400 ETF/h2
  • Current Price: $$366.13
  • 52 Week Range: $214.22-$384.47
  • Dividend Yield: 1.67%
  • Expense Ratio: 0.23%

The SPDR S&P MIDCAP 400 ETF (NYSE:MDY) provides exposure to 400 mid-cap companies.

Get The News You Want
Read market moving news with a personalized feed of stocks you care about.
Get The App