Long-term equity portfolios are typically diversified across sectors and regions, as well as market capitalization (cap). Understanding the characteristics of these categories is important as they have different risk / return profiles and can behave differently depending on market conditions.
We spoke earlier about an Exchange Traded Fund (ETF) that tracks stocks. Today we'll focus on mid-caps and take a closer look at two funds.
The Case for Midcaps
In the US, midcap stocks are typically considered those companies with a market capitalization between $ 2 billion and $ 10 billion. However, differences in definition may exist between brokers. Likewise, some ETFs that describe themselves as "midcap" may include companies with a market capitalization of more than $ 10 billion. Historically, ceilings have risen for each cap category.
Market value affects expectations about a company's future. Mid-cap stocks have grown large enough to graduate from the small-cap realm. Their activities are thus more established and possibly less risky. However, if the economic contraction lasts longer than expected, mid-caps may have a harder time weathering the storm than large caps.
Nevertheless, they are still small and possibly flexible enough to continue growing into a larger company. For example, a company with a market value of $ 7 billion is likely to double in value more quickly than a company with a market capitalization of $ 70 billion.
The theme "mergers and acquisitions" (M&A) is often significant for medium-sized companies. Management could decide to buy a smaller company or merge with a comparable or even larger company. Such an approach could become both a boon and a curse for a mid-cap company and its investors. Significantly, large caps tend to acquire mid caps, a move that typically creates value for shareholders.
Academic research and most financial planners tend to agree, a diversified portfolio that includes companies of different market capitalizations could help reduce risk and volatility. As such, long-term investment returns are likely to be higher.
Midcap companies generally do not have as much analyst coverage as large companies. This leaves room for quite a few of them to stay under the radar. Investors willing to spend time researching are likely to find mid-cap companies with a promising future.
Alternatively, they can do due diligence on a range of funds that specialize in mid-cap stocks. Here are two that may be of interest:
1. SPDR S&P MIDCAP 400 ETF
Current Price: $$ 366.13
52 Week Range: $ 214.22- $ 384.47
Dividend Yield: 1.67%
Expense ratio: 0.23%
The SPDR S&P MIDCAP 400 ETF (NYSE 🙂 provides exposure to 400 midcap companies.
MDY follows it. The top ten holdings make up approximately 7% of net assets, which are approximately $ 15.5 billion. No company has a weighting of more than 0.8%. In other words, company-specific risks have largely been split up.
At the head of the current holdings list: SolarEdge Technologies (NASDAQ :), Enphase Energy (NASDAQ :), Monolithic Power Systems (NASDAQ :), Generac Holdlings (NYSE :), and Trimble (NASDAQ :).
In terms of sector allocation, industrial companies (17.89%) top the list, followed by information technology (16.07%), consumer discretionary (14.92%), financial services (14.03%), healthcare (11.36%), real estate (9.35%), basic materials (5.89%), consumer staples (3.93%), utilities (3.73%), communications services (1.68%) and energy (1.16%).
Since the beginning of the year, the fund is down about 3%. In comparison, the SPDR S&P 500 ETF (NYSE :), which tracks the index, is up nearly 8%. In other words, S&P midcaps are lagging behind. The lagging P / E and P / B ratios of MDY are 21.42 and 1.87, respectively. Investors who expect mid-caps to eventually catch up with large-cap stocks should consider buying the dips.
2. Vanguard Mid-Cap ETF
Current Price: $ 187.03
52 Week Range: $ 110.05 – $ 187.54
Dividend Yield: 1.63%
Expense ratio: 0.04%
The Vanguard Mid-Cap Index Fund ETF (NYSE 🙂 also provides exposure to a range of US mid-cap companies.
VO, which has 360 companies, follows the. The ten largest holdings make up nearly 8% of net assets, which amount to $ 116 billion.
Lululemon Athletica (NASDAQ :), Digital Realty Trust (NYSE :), DexCom (NASDAQ :), DocuSign (NASDAQ 🙂 and Veeva Systems (NYSE 🙂 are at the top of the fund. Investors may notice that each of these companies has capitalizations in excess of $ 10 billion.
The top sector allocation (by weighting) is Technology (21.10%). Next in line are financial services (20.30%), industry (15.70%), consumer services (11.50%), healthcare (9.70%) and consumer goods (9.60%).
Year-to-date, the fund is up about 5%, hitting a record high on Oct. 12. Rating – as would be indicated by the lagging P / E (25.9) and P / B (2.9) ratios – remains high. The current earnings season could turn a large number of stocks into profits in the short term, which could put pressure on the fund.
A drop to $ 175 would improve the margin of safety for long-term portfolios.
