The Case for Mid-Cap Stocks: There's More in the Middle
The investment importance of mid-cap stocks is somewhat misunderstood and frequently overlooked by investors. Despite having little exposure within investor portfolios, mid-caps have long provided more opportunities for long-term growth than large-cap and small-cap stocks. These opportunities include the potential for greater long-term returns than large-cap stocks with less risk and volatility than small-cap stocks.

Outperformance
20-year annualized returns as of 12/31/16

Source: Bloomberg
For the 20-year period ending December 31, 2016, mid-cap stocks outperformed both large caps and small caps by 2.12% and by 1.73%, respectively.
Mitigate Risk
20-year Standard Deviation of returns as of 12/31/16

Source: Bloomberg
In addition, for the 20-year period ended December 31, 2016, mid-cap stocks delivered these solid returns with less volatility than small-cap stocks (17.06 vs. 20.07). A lower Standard Deviation is an indication of less risk.
Better risk-adjusted returns
20-year Sharpe Ratio as of 12/31/16

Source: Bloomberg
Combined, these characteristics yield a better risk-adjusted return than either large-cap or small-cap stocks. The Sharpe Ratio is a measure of reward per unit of risk. The higher the Sharpe Ratio, the better the index has performed in proportion to the risk taken. Over the 20-year period ended December 31, 2016, mid-caps have a Sharpe Ratio of 0.52 vs. 0.43 and 0.39 for large- and small-cap stocks, respectively.
Mid caps offer the best of both worlds
With mid-cap companies, there is an opportunity to get the best of both worlds. Large companies are typically well known, mature, and established, enabling them to garner a significant portion of core investable assets. On the other hand, small companies tend to be start-ups with a reputation for accelerated growth. In the middle of the equity universe are frequently overlooked mid-size companies that combine some of the best attributes of small and large companies. These include:
- Seasoned management teams
- Sound infrastructure and technology
- Broad distribution channels
- Dominant market presence
- Greater access to capital
- Nimble and entrepreneurial with less bureaucracy
Overlooked and underexposed
While the opportunities in mid-cap stocks are clear, investors remain underexposed to mid caps. Currently, mid caps make up approximately 27% of the U.S. equity universe, but only 14% of U.S. mutual fund assets are within Morningstar mid-cap categories. One reason for this may be the lack of research analyst coverage of mid-size and smaller companies. Less coverage can translate into greater opportunities to exploit market inefficiencies within the mid-cap space.
Sources: Bloomberg and Morningstar as of 12/31/16.
Many investors have allocations to small- and large-cap stocks, but they may be missing an opportunity for greater growth potential if they don’t consider an allocation to mid caps.
Meeder Quantex Fund (FLCGX): A Proven Mid-Cap Solution
Consider Meeder Quantex Fund (FLCGX) for your clients’ allocation to mid caps. The Fund is a proven mid-cap solution that incorporates a time-tested, model-driven process to select stocks with strong growth potential. We believe the greatest growth potential comes from companies deemed to be “fallen angels.” Our definition of "fallen angels" are companies which have fallen substantially from all-time highs or are being impacted by a near-term disruption to their business.
Outperformance among mid-cap peers
Annualized returns for the 10-year period ending 12/31/16

Sources: Bloomberg and Morningstar as of 12/31/16.