Forget FANG Buy Mid-Cap Stocks

Everyone loves the large-cap names. Stocks like Walmart INC (WMT), Boeing (BA), JP Morgan (JPM) and Intel Corp. (INTC) are darlings of institutional investors and money managers alike. So then there are the FANG and other tech names, like Microsoft (MSFT), PayPal (PYPL) and Cisco Systems (CSCO) that everyone flocks to. However, should being a “large cap” be the only thing that qualifies a stock for a place in smaller portfolios?

Let’s see where else retail investors might find a better bang for their bucks. Hint: They’re not too large nor too small!

The Mid-cap case

Large caps are typically stocks that enjoy great brand names and often don’t experience too much trading volatility. They are “steady-Eddy” type stocks that everyone gravitates towards because they are better known.

Their small cap cousins are usually innovative companies that promise higher growth. However, because they aren’t as well-known as their bigger cousins, few investors (barring venture capitalists and hedge funds) own them. As a result, not many retail investors are aware of these names, and they are thinly traded. Small caps also have higher volatility.

With growing global geopolitical and economic uncertainty, now is not the time for exposing your portfolio to too many risks. Sure, you might be able to pick a high-flying large-cap name and ride the wave for a while. However, all it takes is one political misstep or a faltering economic indicator, and your portfolio can come crashing down.

Moreover, while small caps may promise better growth, in economic climates where growth is hard to get, they may not be the best stocks to bet on in the coming months (and quarters!). So, what is a good bet for retail portfolios?

Mid-caps offer a sweet spot, in terms of risk-reward, ideally placed between slower-growing large caps, and faster-growth smaller cap stocks. In today’s investment climate, these (mid-caps) are just the right type of investment that you need, because they inherit the qualities of both their large and smaller cousins.

Specifically:
• Mid-caps have typically grown out of their more volatile small-cap status, and therefore offer less unpredictability to a portfolio
• Faster-growing small caps are susceptible to missteps that make them stumble and fall (hard!). While mid-caps still grow more robustly than their large-cap siblings, the rate of growth is more “tempered,” making them less likely than small-cap companies to crash and burn

As we can see from the chart here, comparing Large Cap ( S&P 500 (^GSPC)), Mid Cap (S&P MID CAP 400 INDEX (^MID)) and Small Cap (S&P 600 (^SML)) indices, ^MID has left its two other siblings way behind over the longer term. Even over the past 5 and 10-years, Mid Caps have handily outperformed their smaller and larger peers.

The case for owning mid-cap stocks gets even stronger when we look at the performance of several other indices in these spaces.

When we do a side-by-side comparison of the performance of Small, Mid and Large caps, over a long (600-day), intermediate (100-day) and short (20-day) time horizon, it’s clear to spot the winning trends. Overall, Mid-caps have held up exceptionally well for investors in all those periods (except for the short-term performance of the broader S&P 500).

There is a very bullish case to make in favor of adding (or increasing) mid-cap holdings to your portfolios!

The Play

So, how would a retail investor play the mid-cap space? Well, one way to get mid-cap exposure would be to own ETFs that invest in that space.

Four ETF’s to consider would be:
• iShares Russell Mid-Cap ETF (IWR)
• SPDR S&P MidCap 400 ETF (MDY)
• iShares Morningstar Mid-Cap ETF (JKG)
• JPMorgan Divers Ret US Mid Cp Eq ETF (JPME)
As indicated by the graph here, all four ETFs have performed remarkably well over the long and intermediate period, but have lagged over the short-term.

A basket of these 4 ETFs, held in a portfolio in the intermediate term, would have yielded an average return of 3.62%.

If you are a DIY investor and prefer to be selective about which mid-cap stocks to add to your portfolio, then perhaps these names might interest you:

• Ross Stores, Inc. (ROST)
• O’Reilly Automotive, Inc. (ORLY)
• Dollar General Corporation (DG)

Once again, like their ETF peers, all three names have done exceptionally well over the long and intermediate term, but have lagged in the short run.

However, a basket of just these three individual names, held over the intermediate period, wouldhave yielded an eye-popping 9.17% average return. Yet another reason to be bullish on mid-caps!

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