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Why Mid-Cap ETF Investing Makes Sense

This article was originally published on ETFTrends.com.

Investors looking to pair the growth factor with mid-cap stocks have some compelling ETFs to consider, including the Vanguard Mid-Cap Growth ETF (VOT) .

Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow and provide more stable stock prices. Additionally, they are not so big that their size would slow down growth.

VOT “targets stocks representing the faster-growing and more richly valued half of the U.S. mid-cap market and weights them by market capitalization,” said Morningstar in a note out Friday. “These firms have attractive outlooks, but there is always a risk that they won't live up to the market's expectations. Many of the fund's holdings have not yet established sustainable competitive advantages and may not hold up as well as large caps during market downturns.”

Mid Cap Stocks - Market's Sweet Spot

As is the case with many Vanguard ETFs, VOT features a low expense ratio at just 0.07% per year, or $7 on a $10,000 investment. That makes VOT cheaper than 94% of competing funds.

Middle capitalization stocks, or sometimes referred to as the market’s sweet spot, could help investors achieve improved risk-adjusted returns. Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow and provide more stable stock prices. Additionally, they are not so big that their size would slow down growth.

“Mid-cap growth companies tend to have greater growth potential than their larger counterparts. But they also tend to be more volatile and could be more prone to mispricing, as fewer analysts cover these firms,” said Morningstar. “While some of the fund's holdings may exceed expectations, there is always a risk that investors may be overly optimistic about these firms' growth prospects.”

Related: Value ETFs Among Current Bull Market Best Performers

VOT holds 158 stocks, nearly 47% of which hail from the industrial and technology sectors. Financial services and healthcare names combine for almost a third of VOT's weight. The median market value of VOT components is $15.5 billion.

“Because the fund does not adjust for differences in industry growth rates, it tends to have persistent overweightings in certain sectors like technology and healthcare, and underweightings in others like utilities and financial services,” according to Morningstar. “The mid-cap growth category average has similar sector tilts, but this fund has greater exposure to consumer cyclical stocks and less exposure to the financial-services sector.”

For more information on mid-caps, visit our mid-cap category.

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