| CHICAGO, April 7
CHICAGO, April 7 Go for the most famous
companies when you are investing, and you are likely to pay the
highest price possible because most investors place a premium on
the biggest-name stocks. But take a look at the roughly 1,500
companies that make up the mid-cap market, and you could be
making a pretty solid investment this year.
Mid-caps, with market values between $1 billion and $15
billion, are often the least visible choices in investing. They
are big enough to have mature management teams, yet may not
carry the same downside risk as a mega-cap or a small company.
They may be able to grow more robustly than mega-caps because of
their size. And as market valuations have climbed for both mega-
and small caps, mid-caps offer returns that are right down the
middle of the plate.
The S&P MidCap 400 index returned 23.2 percent for
the 12 months through April 4 compared to 22 percent for the S&P
500 index of big stocks and 29 percent for the
small-company S&P 600 index.
To gain a broad sampling of mid-caps, you'd need an index
fund like the iShares S&P Mid-Cap 400 Growth ETF. The
fund invests in a wide basket of mid-cap companies like Keurig
Green Mountain Inc, Affiliated Managers Group Inc
and Trimble Navigation Ltd.
The iShares fund gained 32 percent last year, roughly
tracking the S&P 500. It's up 0.78 percent year to date through
April 4. The fund charges 0.25 percent for annual expenses.
A worthy alternative to the iShares fund is the SPDR S&P
Mid-cap 400 ETF, which is up 2 percent year to date
through April 4. It edged the S&P 500 last year by just under 1
percentage point and also charges 0.25 percent annually for
For a more focused and active mid-cap strategy, consider the
Baron Partners Retail Fund, which owns companies like
Arch Capital Group Ltd, ITC Holdings Corp and
Hyatt Hotels Corp. Its strategy is to hold stocks long
term with a goal of finding companies whose market value could
increase 100 percent within four subsequent years.
The Baron fund, coming off a stellar 2013, in which it
gained nearly 48 percent - beating the S&P 500 by 15 percentage
points - is up almost 4 percent year to date through April 4. It
costs 1.38 percent annually to own. According to S&P Capital
IQ's MarketScope Advisor, "The fund is relatively concentrated,
with just 26 holdings and more than two-thirds of assets
invested in its top-10 holdings." While it's much more expensive
than an index fund, its performance may be justified on the
If you're looking for bargain-priced mid-caps, turn to the
Vanguard Mid-Cap Value ETF. The fund holds undervalued
stocks like Macy's Inc, Delphi Automotive PLC
and Western Digital Corp. It charges 0.10 percent
annually and is up nearly 4 percent year to date through April
4. It gained nearly 38 percent last year, besting the S&P 500 by
more than 5 percentage points.
How will mid-caps do this year? There are no guarantees
their bull run will continue, but should the U.S. economy
continue on its upward trajectory, mid-cap performance may hold
up. The companies tend to be slightly more resilient to economic
softness and will benefit from improvements in hiring, economic
output, retail sales and the housing market.
So far, the signals are all green for mid-caps. Growth in
U.S. gross domestic product was revised up to 2.6 percent for
the fourth quarter of last year by the U.S. Bureau of Economic
Analysis. That compares to 1.4 percent for the same quarter a
Last week, Federal Reserve Chair Janet Yellen affirmed the
central bank's "extraordinary commitment" to boosting the
economy. The Fed has kept interest rates near zero since late
2008 and is expected to continue that policy through this year.
The jobless rate is down to 6.7 percent from a post-meltdown
high of 10 percent. Inflation is hovering around 2 percent.
What's more important than short-term economic news is
taking the long view on mid-caps. They do well over the long run
when there's sustained economic growth, showing a pronounced
advantage over the more popular mega-caps - even during
For the past 10 years, for example, a broad-basket mid-cap
fund like the iShares S&P Mid-Cap 400 posted a nearly 10 percent
annualized average rate of return. That compares to 7 percent
for the S&P 500. Keep in mind that period includes the meltdown
year of 2008.
But the mid-cap advantage fell behind the S&P 500 over the
past three years by 2 percentage points, so to achieve the
outperformance over big stocks you need to buy and hold
mid-sized companies for the long term. The mid-cap return
premium - at least in recent years - occurs when large company
prices are at their most volatile.
(Follow us @ReutersMoney or here
Editing by Beth Pinsker and Leslie Adler)