Mid-cap stocks are often overlooked by investors but ETFs targeting this market segment have outperformed the S&P 500 in 2013 to extend a decade-long streak.
SPDR S&P MidCap 400 (MDY) has a 10-year annualized return of 11.4% to easily outpace the 7.9% return posted by the S&P 500, according to Morningstar.
“Mid-cap stocks tend to be more volatile because of narrower economic moats and a greater sensitivity to macroeconomic risks, but with this greater volatility comes a higher beta and the expectation for higher returns,” says Morningstar analyst Michael Rawson in a report on MDY. [‘Impressive’ Returns of Mid-Cap ETFs Get Lost in the Mix]
“However, this stretch of outperformance has caused mid-caps to look expensive relative to large caps,” he wrote. “While over long periods of time mid-cap stocks tend to outperform, it is unlikely that they will be able to continue to outperform at the same rate as they have over the last decade. Although this asset class should be part of any equities investment allocation, mid-caps’ higher valuations and greater vulnerability to economic conditions are reasons for caution.”
Still, technical analyst Tarquin Coe at Investors Intelligence notes that mid-caps have been heating up again recently.
“That is reasserting the long-term relative uptrend and is bullish for the market as a whole,” he said in a newsletter.
“Despite being at record highs, breadth is not overstretched in U.S. mid-cap stocks,” Coe said. “Breadth is steadily rising, indicating increasing participation as the market climbs, which is bullish.” [Equal-Weight ETF Consistently Outperforming S&P 500]