Often overlooked, mid-cap funds show strong performance.
Mid-cap investments, like middle children, often get overlooked. However, research shows this segment of the market outperforms. A recent research report from State Street Global Advisors shows mid-cap stocks, as measured by the S&P 400, had smaller declines during market sell-offs or recovered faster, relative to large- and small-cap stocks. Mid-cap stocks are roughly defined as companies with a market cap between $2 billion and $10 billion. Daniel Milan, financial advisor and managing partner of Cornerstone Financial Services, says he has shifted client portfolios to have more mid-cap funds as his firm expects over the intermediate term that mid-caps could have a better return and lower risk than small caps. “We think the companies that will thrive coming out of this (recession) will be in the mid-cap space,” he says. Here are eight of the best mid-cap funds to consider.
Schwab U.S. Mid-Cap ETF (ticker: SCHM)
SCHM is a market-cap-weighted index fund that follows the Dow Jones U.S. Mid-Cap Total Stock Market Index. Milan says he likes this index as it’s a total stock market blend, which gives it a little more breadth than other mid-cap index funds. “For us, it provides a little bit more diversity within the underlying index, which, in mid-cap, I think is important, especially from a risk standpoint,” he says. Unlike other mid-cap funds that may include some small-cap holdings, SCHM exclusively tracks mid-cap stocks such as Whirlpool Corp. (WHR). The fund has a very low annual expense of 0.04%, which translates to $4 for every $10,000 invested.
JPMorgan Diversified Return U.S. Mid Cap Equity ETF (JPME)
JPME is a smart beta exchange-traded fund, and it tracks an index of U.S. mid-cap stocks that were chosen based on three academically researched factors: value, momentum and quality. “Very specific to where we are today, those three factors are the most important,” Milan says. The ETF applies these factors by sector to remove lagging stocks. By choosing value and quality, the fund takes on a defensive flavor. And by adding the momentum factor, the fund “lets you take advantage of any growth opportunity,” he adds. Top holdings include homebuilder Toll Brothers (TOL) and electronics retailer Best Buy Co. (BBY). The expense ratio is 0.24%, which he says is a good value for this type of fund.
BlackRock Mid-Cap Growth Equity Fund (CMGIX)
Eric Bond, president of Bond Wealth Management, says he likes CMGIX — an actively managed mutual fund — for its strong performance and low fees. Its expense ratio comes in at 0.8%. He notes the fund has a growth tilt because of its heavier weighting in biotech and technology, and its concentrated holdings of 60 stocks. The fund takes average risk but has a high return compared with its category of mid-cap growth. It has outperformed its benchmark index, the Russell Midcap Growth Index, on a three-, five-, 10- and 15-year time frame and has performed in the top quartile of its category, too.
Vanguard Mid-Cap Index Fund (VIMAX)
VIMAX is one of the cheapest mid-cap mutual funds available, with an expense ratio of 0.05%. It’s a mid-cap blend of value and growth. Bond says this fund can work as an inexpensive core holding for an investor who is looking to diversify their holdings between large-cap and small-cap funds. “Vanguard is pretty well known, and I think it’s important for consumers to feel comfortable about the issuing company,” he says. The fund follows the CRSP U.S. Mid Cap Index, a broad, market-cap-weighted index. It has more than 350 holdings, and the top 10 holdings — which includes athletic apparel company Lululemon Athletica (LULU) — represent just 8% of total assets. This fund is also available as an ETF under the ticker symbol VO, with an expense ratio of 0.04%.
Vanguard S&P Mid-Cap 400 ETF (IVOO)
Robert Johnson, CEO and chairman of Economic Index Associates, says IVOO follows the S&P 400, a market-cap-weighted index of U.S. mid-cap companies. The fund is a mid-cap blend, holding both growth and value stocks. IVOO has a slightly higher weight to financial firms than its peers and is slightly overweight versus its category. Johnson says this fund’s expense ratio of a very low 0.1% makes it his top pick. “The bottom line for investors is that fees are certain and returns are uncertain. If you can minimize fees, you have a better chance of maximizing returns,” he says. To top it off, U.S. News & World Report ranks IVOO as the No. 1 mid-cap blend fund.
Invesco S&P MidCap Low Volatility ETF (XMLV)
Another smart beta fund, XMLV is an index of the 80 least-volatile firms in the S&P MidCap 400. Invesco weights stocks so that those with the lowest volatility get the highest weight. “We use this fund a lot,” says Morgan Hill, CEO and owner of Hill & Hill Financial. He says a low-volatility fund helps to reduce the market swings and limits potential downside, which is important for many of his clients. This fund has $2 billion in assets under management and a relatively low expense ratio for a smart beta product, at 0.25%. The fund has its heaviest weights in the industrials sector, at about 19% of the portfolio.
Voya Russell Mid Cap Index Portfolio (IIRMX)
Sergey Savastiouk, CEO of internet investment advisor Tickeron, says IIRMX is a solid choice for a mid-cap blend mutual fund. It has a relatively low expense ratio of 0.4% and a low portfolio turnover of 8%, which means managers conduct little buying and selling that can raise costs. IIRMX has rebounded steadily since the first-quarter market sell-off — up more than 30% since March — and is outperforming its peers year to date. The fund follows the Russell Midcap Index, and it currently is underweight financial services and overweight utilities compared with its peers. Top holdings include tech company DocuSign (DOCU) and auto parts retailer O’Reilly Automotive (ORLY).
Fidelity Extended Market Index Fund (FSMAX)
Savastiouk notes that FSMAX, a mid-cap growth fund, has had a solid performance in 2020. The fund rebounded from the first-quarter sell-off and is up about 3% year to date, handily outpacing both its category and index on a one-, three- and five-year time frame. He points out that FSMAX has both a low expense of 0.05% and a low turnover rate of 15% — both of which allow retail investors to keep more of their money. FSMAX is overweight health care, technology and real estate compared with its category, and underweight industrials and financial services. Top holdings include investment management company The Blackstone Group (BX) and cloud computing company Veeva Systems (VEEV).
Eight mid-cap funds to consider:
— Schwab U.S. Mid-Cap ETF (SCHM)
— JPMorgan Diversified Return U.S. Mid Cap Equity ETF (JPME)
— BlackRock Mid-Cap Growth Equity Fund (CMGIX)
— Vanguard Mid-Cap Index Fund (VIMAX)
— Vanguard S&P Mid-Cap 400 ETF (IVOO)
— Invesco S&P MidCap Low Volatility ETF (XMLV)
— Voya Russell Mid Cap Index Portfolio (IIRMX)
— Fidelity Extended Market Index Fund (FSMAX)
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Update 08/25/20: This article was published on a previous date and has been updated with new information.