A mid-cap stock is a financial security that represents an ownership interest in a publicly traded firm that has a market capitalization (the share price times the number of shares outstanding) between that of small-cap and large-cap stocks. Learn more about mid-cap stocks and when to invest in them.
- Written By Thomas J. Brock, CFA®, CPA
Thomas J. Brock, CFA®, CPA
Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.Read More
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- Updated: December 5, 2022
- 5 min read time
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What Are Mid-Cap Stocks?
“Mid-cap” is another term for middle market capitalization. The description refers to a publicly traded company with a moderately sized total market value. At a high-level, publicly traded stocks can be characterized as small-cap, mid-cap or large-cap. From a financial perspective, the breakdown is as follows:
- Small-cap stocks have a market capitalization of $2 billion or less. Based on total market capitalization, small-cap stocks make up about 10% of the U.S. stock market.
- Mid-cap stocks have market capitalizations between $2 billion and $10 billion. They make up about 20% of the U.S. stock market.
- Large-cap stocks have market capitalizations of more than $10 billion. They make up about 70% of the total U.S. stock market.
You can use an investing index such as the S&P 400 Index to gauge how a mid-cap stock performs. It’s important to note that market capitalization does not necessarily equate to the financial success of a company. Mid-cap stocks are not inherently better than small-cap stocks, and they’re not necessarily worse than large-cap stocks.
The well-known mid-cap stocks list includes Alcoa Corporation, Lincoln Electric Holdings, Mattel, Williams-Sonoma and Wyndham Hotels & Resorts.
Small-Cap vs. Mid-Cap vs. Large-Cap Stocks
Beyond their market value differences, mid-cap stocks also tend to fall somewhere between small-cap stocks and large-cap stocks when it comes to their maturity level, growth potential and price volatility. Generally, the following characteristics hold true in publicly traded stock markets:
- The smaller the market capitalization level, the less mature the company and the higher its growth potential. However, higher growth potential often comes with more erratic cash flows, lower dividend payouts and more stock price volatility.
- The larger the market capitalization level, the more mature the company and the lower its growth potential. But a lower growth potential comes with more stable cash flows, higher dividend payouts and less stock price volatility.
Over long periods of time, mid-size stocks can outperform their larger counterparts. This concept is illustrated in the chart for the 20-year period that ended May 31, 2022, showing mid-cap stocks outperforming large-cap stocks.
While this 20-year track record for mid-cap stocks is enticing, it’s important to note that there are certain periods when mid-cap stocks can underperform large-cap stocks.
Unless you’re an experienced securities analyst with plenty of free time, buying individual mid-cap stocks is not recommended, as there’s just too much risk involved. For most people, especially if you’re new to investing, it’s better to go with a fund-style investment such as an exchange traded fund (ETF).
These pooled investment vehicles offer hassle-free, low cost and diversified access to an array of markets and market segments. When it comes to domestic mid-cap stocks, the S&P 400 Index is widely considered to be the best index to use. Two other widely followed mid-cap indexes are the CRSP U.S. Mid Cap Index and the Russell Midcap Index.
If you’re considering investing in a mid-cap ETF, take a look at the passively managed funds we highlight below. They are among the largest and most diversified ETFs on the market, and they are all relatively low in cost.
- Vanguard Mid-Cap ETF (VO) – Launched in 2004, this $132 billion fund seeks to replicate the performance of the Center for Research in Security Prices (CRSP) U.S. Mid Cap Index. It has an annual expense ratio of 0.04%.
- iShares Core S&P Mid-Cap ETF (IJH): Launched in 2000, this $59 billion ETF seeks to track the investment results of the S&P 400 Index. It has an annual expense ratio of 0.05%.
- iShares Russell Mid-Cap ETF (IWR): Launched in 2001, this $27 billion fund seeks to track the investment results of the Russell Midcap Index. It has an annual expense ratio of 0.19%.
- State Street SPDR S&P Mid-Cap 400 ETF (MDY) – Launched in 1995, this $17 billion ETF seeks to track the total return of the S&P 400 Index. It has an annual expense ratio of 0.22%.
Advantages of Mid-Cap Stocks
All things considered, investing in mid-cap stocks is less risky than investing in small-cap stocks. But it can be riskier than investing in large-cap stocks.
Mid-cap stocks often serve as a stabilizing force in an investment portfolio, and they are an important part of portfolio diversification.
Mid-Cap Stock Risks
Every investment opportunity comes with a certain degree of risk, but the risks can be greater with mid-cap stocks than with large-cap stocks, as mid-cap stocks can have more stock price volatility. Essentially, mid-cap stocks will expose you to a much higher degree of volatility than most other asset classes.
The potential growth of these smaller stocks can often overshadow their risks, but it’s important to be aware of the increased volatility. Diversifying your portfolio can help offset the risks, but only to a certain extent.
How to Invest in Mid-Cap Stocks
If you decide that investing in mid-cap stocks makes sense for you, you can purchase shares through your brokerage firm or financial advisor. An increasingly common way to make these purchases is through an online brokerage firm such as Charles Schwab, E-Trade or Fidelity. These firms can facilitate your trades, maintain pertinent records and safeguard your investments in a low-cost manner.
A financial advisor can help guide you through the process of evaluating your financial portfolio and assessing your own tolerance for risk. You can also find a lot of great content, including risk tolerance quizzes, from reputable sources online.
Are Mid-Cap Stocks for You?
When considering if you should invest in mid-cap stocks, it’s important to keep your investment horizon in mind.
Investing in mid- and small-cap stocks only makes sense if you can let the stocks appreciate for at least five years. Ideally, you should let mid- and small-cap stocks grow and appreciate much longer than five years.
4 Cited Research Articles
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- Corporate Finance Institute. (n.d.). Exchange Traded Fund (ETF). Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/exchange-traded-fund-etf/
- CRSP LLC. (2022, March 31). Quarterly Performance: CRSP U.S. Mid Cap Index. Retrieved from https://www.crsp.org/files/crspmi1_quarterly_report-march2022.pdf
- FTSE Russell. (2022, May 31). Russell Midcap Index. Retrieved from https://research.ftserussell.com/Analytics/FactSheets/temp/520187f8-01ac-4cfb-83b5-1828ddbad39b.pdf
- S&P Dow Jones Indices. (n.d.). S&P MidCap 400. Retrieved from https://www.spglobal.com/spdji/en/indices/equity/sp-400/