While many investors tend to think of equity allocations in terms of large versus small cap, we believe they should also consider mid caps. Historical performance and sector diversification both suggest that mid caps have a place in an investor’s broader portfolio.
Mid Caps: An Overlooked Area
Although many investors think of their US equity allocations in terms of large versus small cap, there is a segment of the market that tends to be largely overlooked: the mid caps. In the European ETF space, investors have allocated more than $220 billion to US large cap ETFs, while mid cap strategies have attracted only $1.4 billion.i
We believe investors should pay more attention to the mid cap space and offer two main reasons: performance and diversification.
Over the long term, mid caps tend to offer stronger risk-adjusted returns than large caps and small caps. And even in absolute terms, when we take 5-year rolling returns going back to the index start date of 1995, the S&P MidCap 400 Index has outperformed the S&P 500 in 73% of periods.ii Figure 1 illustrates these results.
Investors who are keen to stay invested in US equities, but who are nervous about the concentration to technology stocks within the S&P 500 index, may also be interested in using the S&P MidCap 400 Index as a way of diversifying their exposure.
This S&P MidCap 400 Index is far more diversified than the S&P 500, with the largest sector, industrials, making up just 18.3% of the index. The weight to the technology sector is massively reduced, making up just 14.3% of the total index compared with more than a quarter of the weight within the S&P 500. The mid cap index is also far more exposed to other cyclical sectors, with financials the second largest sector at 15.8% and consumer discretionary taking 14.6%. See Figure 2 for a full comparison of sector weights of the S&P MidCap 400 Index and S&P 500 Index.
Due to this lower weight to technology and higher weight to more cyclically focused sectors, the S&P MidCap 400 Index may be better positioned to outperform if we continue to see the value and cyclical rotation continue to gather steam as the year progresses.
Access this Exposure with SPDR ETFs
Investors can gain exposure to the S&P MidCap 400 Index through the SPDR S&P 400 U.S. Mid Cap UCITS ETF, the largest and lowest cost S&P MidCap 400 ETF available in Europe. To learn more about this ETF, and to view full performance history, please visit the fund page .
Figure 1: Rolling Trailing 5-Year Returns of US indices Since Index Launch
Source: Morningstar Direct, as of 31 March 2021. Inception dates for the reference indices are: 30 August 1991 for S&P MidCap 400 TR, 31 January 1995 for S&P SmallCap 600 TR. Past performance is not a guarantee of future returns. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
Figure 2: Sector Weights of S&P MidCap 400 Index vs. S&P 500
Source: FactSet, as of 31 March 2021. Sector weights are as of the date indicated and should not be relied upon as current thereafter.
European-Domiciled ETP Segment Flows (Top/Bottom 5, $mn)
European-Domiciled ETP Asset Category Flows ($mn)
Source: Bloomberg Finance L.P., for the period 31 March – 8 April 2021. Flows are as of date indicated and should not be relied upon as current thereafter. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
iSource Morningstar Direct as of 31 March 2021
iiSource: State Street Global Advisors, Morningstar Direct, as of 31 March 2021
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