What Is a Midcap Fund?
A mid-cap fund is a pooled investment vehicle (e.g. a mutual fund or ETF) that explicitly invests in the stocks of mid-cap companies, or companies with market capitalizations ranging from approximately $2 billion to $10 billion.
Key Takeaways
- A mid-cap fund is a pooled investment, such as a mutual fund, that focuses on companies with a market capitalization in the middle range of listed stocks.
- Mid-cap stocks tend to offer investors greater growth potential than large cap stocks, but with less volatility and risk than small cap stocks.
- Mid-cap funds allow investors to easily and cost-effectively hold a diversified portfolio of these types of stocks.
- There are several benchmark indexes that mid-cap funds can track, such as the S&P 400 and Russell 1000.
Understanding Mid-Cap Funds
Mid-cap funds provide a diversified portfolio of mid-cap companies for investors. Mid-cap stock funds invest in firms with established businesses. Therefore, these companies have made equity capital markets a substantial part of their capital structures. Overall, mid-cap companies tend to offer more growth potential than large-cap stocks and with less volatility than the small-cap segment. Mid-cap funds seek to capitalize on this capital appreciation potential by creating funds that are diversified among mid-cap companies.
Many fund companies and indexes focus on mid-cap stocks with an additional component such as growth or value. Mid-cap funds can be actively managed or passively managed. The mid-cap segment of the market offers a wide range of investment options for investors. Some of the mid-cap segment's most popular benchmarks are the S&P MidCap 400, the Russell 1000 MidCap Index, and the Wilshire US Mid-Cap Index. As of December 2020, the smallest member of the Wilshire US Mid-Cap Index was valued at $0.8 billion. The largest had a market capitalization of $23.4 billion.
Defining Midcap
"Mid-cap" is the term given to companies with a market capitalization (or value) between $2 billion and $10 billion. As the name implies, a mid-cap company falls in the middle betweenlarge-cap(or big-cap) andsmall-capcompanies. Classifications such as large-cap, mid-cap, and small-cap are only approximations and may change over time.
Mostfinancial advisorssuggest that the key to minimizing risk is a diversified portfolio; investors should have a mix of small-cap, mid-cap, and large-cap stocks. However, some investors see mid-cap stocks as a way to diversify risk as well. Small-cap stocks offer the most growth potential, but that growth comes with the most risk. Large-cap stocks offer the most stability, but they offer lower growth prospects. Mid-cap stocks are a hybrid of the two, providing both growth and stability.
Benefits of Mid-Cap Funds
Mid-cap funds have some advantages over both individual mid-cap stocks and other fund types. While less volatile than small-cap stocks, holding only a few mid-cap funds is usually much riskier than holding several large-cap stocks. By investing in a mid-cap fund, investors can capture the growth potential of mid-cap funds without company-specific risks.
Mid-cap funds can follow a somewhat different pattern than either large or small stocks. Because of this they are useful for portfolio diversification. Historically, there have been long periods when either large or small stocks outperformed. Choosing a mid-cap fund can prevent investors from going too far in the wrong direction.
Criticism of Mid-Cap Funds
By investing in a mid-cap fund rather than holding individual mid-cap stocks, investors can miss out on massive gains. In particular, the CAN SLIM system developed by William J. O'Neil is often applied successfully to mid-cap stocks. The idea is that winning stocks can be spotted on their way up through the small caps. By the time stocks reach the mid-cap funds, the speculators are ready to profit. For example, O'Neil flagged Netflix (NFLX) as a top pick in 2009. However, most investors are less successful at picking winners.
Examples of Mid-Cap Funds
Here are some examples of the market’s top mid-cap funds.
BlackRock MidCap Growth Equity Fund (BMGAX)
The BlackRock MidCap Growth Equity Fund is an actively managed mutual fund. It seeks to invest in mid-cap companies from the Russell MidCap Growth Index that it believes have superior growth characteristics. As of June 16, 2021, it had a year-to-date net asset value (NAV) return of 4.99%. The fund is benchmarked to the Russell MidCap Growth Index, which had a YTD NAV return of 5.30% as of June 16, 2021. The fund had a gross expense ratio of 1.14% and a net expense ratio of 1.05% for A-shares.
Vanguard Mid-Cap ETF (VO)
The Vanguard Mid-Cap ETF is one of the largest passive index funds in the mid-cap market segment. The fund uses an index replication strategy to track the holdings and performance of the CRSP U.S. Mid Cap Index. As of June 17, 2021, the fund has a year to date NAV return of 13.73%. The fund has an expense ratio of 0.04%.
