What Is a Mid-Cap Fund?
Let me explain what a mid-cap fund is. It's a pooled investment vehicle, such as a mutual fund or ETF, that specifically invests in stocks of mid-cap companies—those with market capitalizations ranging from about $2 billion to $10 billion.
Key Takeaways
You should know that a mid-cap fund is essentially a pooled investment like a mutual fund focused on companies in the middle range of market capitalizations among listed stocks. These mid-cap stocks generally provide greater growth potential than large-cap stocks but come with less volatility and risk compared to small-cap stocks. By choosing a mid-cap fund, you can easily and cost-effectively maintain a diversified portfolio of these stocks. Also, there are several benchmark indexes that these funds might track, including the S&P 400 and Russell 1000.
Understanding Mid-Cap Funds
When you invest in mid-cap funds, you're getting a diversified portfolio of mid-cap companies. These funds target firms with established businesses that have integrated equity capital markets significantly into their capital structures. In general, mid-cap companies offer more growth potential than large caps and less volatility than small caps, and the funds aim to capitalize on this by diversifying across various mid-cap companies.
Many fund companies and indexes add components like growth or value to their mid-cap focus. These funds can be actively managed or passive. The mid-cap market segment provides a broad range of options for you as an investor. Popular benchmarks include the S&P MidCap 400, the Russell 1000 MidCap Index, and the Wilshire US Mid-Cap Index. As of December 2020, the Wilshire US Mid-Cap Index ranged from a smallest member at $0.8 billion to the largest at $23.4 billion.
Defining Mid-Cap
The term 'mid-cap' refers to companies with a market capitalization between $2 billion and $10 billion. As the name suggests, these fall between large-cap and small-cap companies. Keep in mind that these classifications are approximations and can shift over time.
Most financial advisors recommend diversifying your portfolio to minimize risk, which means including a mix of small-cap, mid-cap, and large-cap stocks. Some investors use mid-cap stocks specifically for diversification. Small caps have the highest growth potential but also the most risk, large caps provide stability with lower growth, and mid caps offer a hybrid of growth and stability.
Benefits of Mid-Cap Funds
Mid-cap funds have advantages over individual mid-cap stocks and other fund types. They're less volatile than small-cap stocks, but holding just a few mid-cap stocks is riskier than several large-cap ones. By investing in a mid-cap fund, you capture the growth potential without the risks tied to specific companies.
These funds often follow patterns different from large or small stocks, making them useful for diversifying your portfolio. Historically, there have been periods where large or small stocks outperformed, so a mid-cap fund can help you avoid overcommitting in the wrong direction.
Criticism of Mid-Cap Funds
One downside is that by choosing a mid-cap fund over individual stocks, you might miss out on massive gains. Systems like William J. O'Neil's CAN SLIM are often successful with mid-cap stocks, spotting winners as they rise from small caps. By the time they hit mid-cap funds, speculators may have already profited. For instance, O'Neil highlighted Netflix in 2009 as a top pick. However, most investors aren't as successful at picking winners.
Examples of Mid-Cap Funds
Here are a couple of examples from the market's top mid-cap funds.
Specific Fund Examples
- BlackRock MidCap Growth Equity Fund (BMGAX): This is an actively managed mutual fund that invests in mid-cap companies from the Russell MidCap Growth Index with superior growth characteristics. As of June 16, 2021, it had a year-to-date NAV return of 4.99%, benchmarked to the Russell MidCap Growth Index at 5.30% YTD. It has a gross expense ratio of 1.14% and net of 1.05% for A-shares.
- Vanguard Mid-Cap ETF (VO): This is a large passive index fund that tracks the CRSP U.S. Mid Cap Index using replication strategy. As of June 17, 2021, it had a YTD NAV return of 13.73% with an expense ratio of 0.04%.
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