A midcap fund is a pooled investment vehicle, such as a mutual fund or Exchange-Traded Fund (ETF), that explicitly invests in stocks of mid-cap companies, which are businesses with market capitalizations ranging from approximately $2 billion to $10 billion.
Key Takeaways
- A midcap fund is an investment tool focusing on companies within the middle capitalization range of listed stocks.
- Midcap stocks typically offer greater growth potential than large-cap stocks but with less volatility than small-cap stocks.
- These funds allow investors to easily and cost-effectively build a diversified portfolio of midcap stocks.
- Funds can track benchmark indexes like the S&P MidCap 400 and Russell 1000 MidCap Index.
Understanding Midcap Funds
Midcap funds provide diversified portfolios of midcap companies, targeting firms with established businesses. These companies have integrated equity capital markets into their capital structures, offering more growth potential than large-cap stocks with reduced volatility compared to small-cap stocks. Midcap funds aim to capitalize on this growth potential by diversifying among midcap companies.
Investment firms and indexes may target midcap stocks with growth or value components. These funds can be actively or passively managed, offering a range of investment options. Popular benchmarks include the S&P MidCap 400, Russell 1000 MidCap Index, and Wilshire US Mid-Cap Index. As of December 2020, members in the Wilshire US Mid-Cap Index range from $0.8 billion to $23.4 billion in market value.
Defining Midcap Companies
A “midcap” company has a market capitalization between $2 billion and $10 billion. These companies sit between large-cap (big-cap) and small-cap in terms of size. Classifications may change over time and provide approximations of market size.
Financial advisors often suggest diversification across small-cap, midcap, and large-cap stocks to minimize risk. Midcap stocks offer a balance of growth potential and stability, making them a hybrid option between small-cap’s high growth (and high risk) and large-cap’s stability.
Advantages of Midcap Funds
Midcap funds offer distinct benefits over individual midcap stocks and other fund types. Although they are generally less volatile than small-cap stocks, individual midcap investments are riskier than holding several large-cap stocks. By investing in midcap funds, investors can capture growth potential while reducing company-specific risk.
These funds are valuable for portfolio diversification, often following different patterns than large or small stocks. Historically, there are periods when either large or small stocks perform better, and midcap funds help prevent extreme risks in either direction.
Criticisms of Midcap Funds
Investing in midcap funds instead of individual midcap stocks may result in missed gains. For example, the CAN SLIM strategy, developed by William J. O’Neil, successfully identified potential winners such as Netflix (NFLX) on their rise through small-cap territory before becoming mid-caps. However, not all investors are adept at picking these winning stocks independently.
Examples of Top-Performing Midcap Funds
BlackRock MidCap Growth Equity Fund (BMGAX)
The BlackRock MidCap Growth Equity Fund is an actively managed mutual fund investing in midcap companies from the Russell MidCap Growth Index, selected for superior growth potential. As of mid-2021, it had a year-to-date net asset value (NAV) return of 4.99%, compared to the Russell MidCap Growth Index’s 5.30%. The fund features a gross expense ratio of 1.14% and a net expense ratio of 1.05%.
Vanguard Mid-Cap ETF (VO)
The Vanguard Mid-Cap ETF is large among passive index funds in the midcap market. It employs an index replication strategy to mirror the CRSP U.S. Mid Cap Index’s holdings and performance. As of mid-2021, its year-to-date NAV return was 13.73%, with an expense ratio of 0.04%.
Related Terms: large-cap fund, small-cap fund, growth stocks, value stocks.
References
- Wilshire. “Wilshire US Mid-Cap Index”.
- Financial Industry Regulatory Authority. “Market Cap, Explained”.
- BlackRock. “Mid-Cap Growth Equity Fund”.
- iShares. “iShares Russell Mid-Cap Growth ETF”.
- Vanguard. “Vanguard Mid-Cap ETF (VO)”.
