What is the S&P Midcap 400 Index?
Definition, Historic Performance & Analysis of Mid-cap Stock Investing
What are mid-cap stocks and why should investors care about them? If you are a beginning investor, take time to look at the definition of the S&P Midcap 400. Beginners and advanced investors will both be interested in seeing a comprehensive 15-year performance analysis and comparison in the latter part of this article.
S&P Mid Cap Index Definition
The S&P Midcap 400 Index, also known as the S&P 400, is an index comprised of U.S. stocks in the middle capitalization range.
According to Standard & Poor's website, "the S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index covers over 7% of the U.S. equity market, and seeks to remain an accurate measure of mid-sized companies, reflecting the risk and return characteristics of the broader mid-cap universe on an on-going basis."
According to Morningstar, "middle capitalization range" is from $200 million to $5 billion market value. This may sound large but companies are not widely known until they reach the multi-billion mark. For reference and comparison, mid-cap stocks can include some companies you may have heard of, such as Whole Foods Market, whereas a large-cap company, such as Wal-Mart, is much larger in capitalization ($230 billion in 2012). Small-capitalization companies are not widely known names.
S&P 500 vs S&P 400 vs Russell 2000 Indices
I'll share some thoughts on the numbers after the chart:
|Index Name||3-Yr Return||5-Yr Return||10-Yr Return||15-Yr Return|
All of the above represent annualized total returns as of January 31, 2017. Data from Morningstar, Inc., Vanguard (VIMSX for Mid Cap 400) and iShares (IWM for Russell 2000). Past performance is no guarantee of future results.
Mid-cap Stock Performance Analysis
The first point I'll make is that mid-cap stocks outperform both large-cap and small-cap stocks in the long run, as evidenced by the 15-year annualized returns. Even if you are reading this months or years in the future, the numbers are quite telling. These returns, reaching back as far as 15 years, are significant and meaningful for several other reasons:
- The 5 years ending January 31, 2017 covers most of the bull market beginning March 9, 2009. The recovery from the Great Recession has significantly favored mid-cap stocks. Often, small-cap stocks lead performance in recoveries. Not this time.
- The 15-year returns, going back to 2000, captures the bear market of 2007-2008 and most of two bull markets on either side of the bear.
- Again, it is significant that the S&P Midcap 400 Index beats the S&P 500 Index (large-cap stocks) and the Russell 2000 (small-cap stocks) significantly over a 15-year period, representing an incredibly diverse cross-section of economic and market conditions.
Key Takeaways and Cautions of Investing in Mid Cap Stocks
The mid-cap stock range represents a "sweet spot" of investing because many of the biggest-gaining stocks in the past 10 to 20 years have been the mid-sized companies purchased in blockbuster merger acquisitions.
Also, large-cap stocks (the S&P 500) contains the largest, most demonized, hardest hit sector of the last decade, financial stocks. Finally, small-cap stocks have largely suffered from the stigma of being a "higher risk" area and the incredibly swings up and down in prices have pushed small-cap stocks lower in the extreme selling environments.
Therefore, and in summary, mid-cap stocks won't necessarily continue their dominance over the next 15 years because, as Mark Twain so eloquently stated, "History does not repeat itself, but it does rhyme." Investors who want to add diversity while creating an aggressive portfolio of mutual funds, should definitely take a careful look at mid-cap stock funds, especially the index funds and Exchange Traded Funds (ETF).
Mid-cap funds can be a part of diversified portfolio that includes other mutual funds from different categories and asset classes.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.