What Is the S&P MidCap 400 Index?

Definition & Examples of How to Invest in the S&P MidCap 400 Index

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The S&P MidCap 400 Index is a stock index that tracks the performance of 400 mid-sized U.S. companies. The focus on mid-sized companies distinguishes it from the more popular S&P 500 (which tracks large companies). Investors who buy and hold mid-cap stocks are typically looking for long-term growth and the potential to eventually outperform large-cap stocks.

Here's what you need to know about the S&P MidCap 400 Index, and how you can use it in your investment portfolio.

What Is the S&P MidCap 400 Index?

The S&P MidCap 400 Index is an index comprised of U.S. stocks that strike a middle ground between the largest (large-cap) and smallest (small-cap or micro-cap) public companies. These companies typically have a market capitalization of between $2 billion and $10 billion.

  • Alternate name: S&P 400

Etsy is an example of a well-known company that can be found in the S&P 400.

How Does the S&P MidCap 400 Index Work?

Mid-cap stocks are sometimes said to represent a "sweet spot" of investing because mid-caps have greater growth potential than large-cap stocks and greater price stability than small-cap stocks.

Mid-caps are popular with investors who want to add diversity while maintaining an aggressive portfolio. Investors can potentially achieve greater exposure to the entire U.S. stock market by investing in a large-cap index fund, a mid-cap index fund, and a small-cap index fund.

Investors should always ensure that their investments are appropriate for their level of risk tolerance and long-term financial goals.

How to Invest in the S&P MidCap 400 Index

You can't directly buy shares in the S&P 400, but it is easy to acquire products that track this index. If you have the capital on hand, you can recreate the index yourself by individually buying all the stocks in the index.

For those who don't have the means to buy hundreds of stocks at once, exchange-traded funds (ETFs) and mutual funds make it easy to add the same exposure at a lower cost.

Mutual funds that track the S&P 400 include:

  • Vanguard S&P Mid-Cap 400 Index Fund Institutional Shares (VSPMX)
  • Principal MidCap S&P 400 Index Inst (MPSIX)
  • BNY Mellon MidCap Index Inv (PESPX)

ETFs that track the S&P 400 include:

  • iShares Core S&P MidCap ETF (IJH)
  • SPDR S&P MidCap 400 ETF Trust (MDY)
  • Vanguard S&P MidCap 400 ETF (IVOO)

The S&P 400 is not the only index that tracks a mid-cap stock index. Other examples of mid-cap indices include the Russell Midcap Index and the Wilshire Mid-Cap Index. These indices track similar segments of the market, but they use slightly different methodologies. Like the S&P 400, investors can buy ETFs and mutual funds that track Russell and Wilshire indices.

Pros and Cons of the S&P MidCap 400 Index

Pros
  • Growth potential

  • Relative stability

  • Diversification

Cons
  • Price risk

  • Principal risk

  • Fund management fees

Pros Explained

  • Growth potential: Companies that are mid-capitalization are generally established businesses that are still in the growth phase of the business cycle. This offers investors the potential that the mid-cap stock price grows as it transitions into a large-cap stock.
  • Relative stability: Compared to smaller capitalization, mid-cap stocks can provide growth opportunities with less price volatility
  • Diversification: Mid-cap stock index funds typically invest in hundreds of stocks, representing multiple market sectors. Diversification can help to reduce market risk.

Cons Explained

  • Price risk: While mid-cap stocks are more stable than small-cap stocks, they are more volatile than large-cap stocks. If you prioritize minimizing price risk, then mid-cap stocks may not be the best fit for you.
  • Principal risk: Like with any other stock, mid-cap stocks have the potential to decline in value below the original amount invested by the shareholder. It is possible to lose your principal investment with mid-cap stocks.
  • Fund management fees: Unless you have the cash to buy hundreds of stocks at once to replicate the S&P 400 on your own, you'll probably have to buy an ETF or mutual fund that tracks the index. There are a lot of benefits to these products, but a downside is that you'll have to pay a fund manager a fee for tracking the index on your behalf.

Key Takeaways

  • The S&P MidCap 400 Index is an index that tracks 400 mid-cap public companies in the U.S.
  • The S&P MidCap 400 Index represents a sort of middle ground between large-cap stocks (which are more stable but grow more slowly) and small-cap stocks (which are less stable but offer opportunities for more rapid growth).
  • The easiest way to invest in this index is through an ETF or mutual fund.
  • There are other indexes that use slightly different methods to track mid-cap stocks, the S&P 400 is just one example of a mid-cap index.

Article Sources

  1. S&P Dow Jones Indices. "S&P MidCap 400 Index." Accessed Aug. 21, 2020.