The ‘Sweet Spot’ Stocks Most Investors Miss

Midcap stocks have been met with indifference by many investors, but may be worthy of some attention, according to a recent article in Investor’s Business Daily.

So far this year, the article reports, midcaps (stocks valued at an average of $4 billion) are outperforming their small cap peers, but tend to “fall through the cracks” since they’re below the large-cap threshold ($8 billion) and above the small-cap threshold ($1 billion).

The article cites comments from Todd Rosenbluth, head of ETF and Mutual Fund Research at CFRA, who said that about 75% of ETF dollars are invested in funds that lean toward large caps. He said, “We don’t think (midcaps are) necessarily getting enough of the overall market share here.”

The explanation may harken back to academic research by Eugene Fama and Kenneth French that showed “tilting portfolios toward large value-priced stocks and small caps delivered optimum risk-adjusted returns.” The article reports that half the number of Wall Street analysts cover companies in the S&P 400 midcap stock index (across sectors), as cover S&P 500 companies.

But strategy is important, says Mat Bartolini, head of SPDR Americas Research. He points out that most of the 321 active midcap funds don’t have a good track record, and two-thirds have missed their benchmarks over the last five years. So, it’s important to know what’s in your portfolio, he argues: “A¬†misstep in implementing a midcap strategy can be almost as detrimental as having none.”¬†