How to Invest in Mid Caps

Investing in mid cap companies

The sometimes-forgotten sweet spot between small cap and large caps, mid cap stocks can be an important part of a diversified portfolio. Mid caps can offer the “best of both worlds” – between the stability commonly found in large caps and the growth potential (but higher risk) commonly found in small cap stocks.

What is a mid cap?

To explain a mid cap, we should first explain market capitalization. Market capitalization, or market cap, is the total value of a publicly traded company. Market cap is calculated by multiplying the total number of shares outstanding of a company by the current share price. If a company has 10 million shares outstanding and the current price of those shares is $40 per share, that company has a market cap of $400,000,000. Mid cap companies have a market cap of between $2 billion and $10 billion.

A mid-cap company falls in the middle between large-cap (or big-cap) and small-cap companies. For comparison, small cap companies can be between $300 million and $2 billion in size and large cap companies have a market cap of over $10 billion dollars. Anything with a market cap of less than $300 million is considered micro-cap.

Mid cap companies tend to be substantial firms with solid businesses, with an established foothold in their respective market. Mid caps are often domestic or niche companies that are looking to expand. Since mid-cap stocks may offer both dividends and price appreciation (an increase in value), they can balance investment portfolios between income (investments that pay dividends) and growth (investments that increase in value). In effect, mid-caps offer a compromise between the growth, risk and volatility trade-offs of their larger and smaller counterparts.

For a tangible example, here are a few mid cap companies you might have heard of:

• Harley Davidson
• Texas Roadhouse
• Whirlpool

Your search doesn’t have to stop at “mid cap funds” or “mid cap companies.” Magnifi's search bar can help you find companies with specific market capitalizations.

Comparing Mid Caps

Benchmarks are helpful tools used to create a standard of performance and allow an investor to compare the performance of their investment to what “should” be happening with that investment. There are two main benchmarks for mid-cap stocks:

S&P MidCap 400 Index

This index tracks the performance of 400 mid-sized U.S. companies with valuations between about $2 billion and $8 billion.

Russell Midcap Index

This index tracks nearly twice as many companies as the S&P index — more than 800 — and is a subset of the larger Russell 1000 Index.

When you look at the performance of a mid cap stock or fund, you can compare the performance against the benchmark.

Why invest in mid cap stocks?

According to Hennessy Funds, the longer mid-cap stocks are held, the more likely they are to outperform -- 69% of the time, mid-caps outperformed small-cap and large-cap stocks over any 10-year rolling period in the past 20 years (1).

Hennessy (using Morningstar data) says that, “not only have mid-cap stocks generated higher absolute returns over a longer time frame, but they have also provided these returns with less associated risk” (2).

The outperformance of mid-caps stems from the fact that many of these companies exhibit solid growth, either as they expand overseas or into new products and services. Historically, mid-cap companies offer one of the best ways to profit from an economic recovery. That is a result of their large exposure to the industrial sector.

According to research by John Hancock Investing, “after the early 2000s recession, mid-cap equities outperformed large caps for three consecutive years – 2003 through 2005. Similarly, mid-caps performed well after the global financial crisis, beating large caps four out of five years from 2009 through 2013” (3).

How to invest in mid cap stocks

When deciding if or which mid cap stock to add to your portfolio, your individual asset allocation should always be based on your risk tolerance and your investment goals. To invest in a mid cap, you can either invest in the stock of a specific mid cap company or invest in a mid cap fund. The fund will give you added diversity and allow you to invest in many mid caps at once. There are about 40 ETFs and 600 mutual funds that invest in mid cap companies. By doing so, you can reduce the risk associated with owning any individual stock while positioning your portfolio to benefit from broader market gains.

You can find funds that track key mid-cap benchmarks, styles of investing like growth versus value and mid-caps in specific industries. Try searching for the following:

• Invest in mid cap companies
• Invest in mid cap funds
• Mid cap funds with exposure to industrials

References:

1. Hennessy, Neil; Kelley, Ryan; and Wein, Joshua, The Power of Mid-Caps, Hennessy Funds, September 2022, https://www.hennessyfunds.com/insights/midcap-investment-idea.
2. Hennessy, Neil; Kelley, Ryan; and Wein, Joshua, The Power of Mid-Caps, Hennessy Funds, September 2022, https://www.hennessyfunds.com/insights/midcap-investment-idea.
3. Roland, Emily and Miskin, Matthew, “Midcycle investing: a guide to portfolio construction,” John Hancock Investment Management, https://www.jhinvestments.com/resources/all-resources/education/midcycle-investing-a-guide-to-portfolio-construction