Although ETF investors favor large and small caps over mid-cap strategies, performance data from Bank of America shows that this is misguided, according to a recent article in CityWire.
The BofA reports shows that mid-cap ETFs account for only 5% of total inflows so far this year but are responsible for 31% of US corporate earnings and 39% of total market returns. And even though past performance doesn’t indicate what will happen in the future, the BofA report makes three strong arguments for investing in mid-caps:
- Mid-caps are more sensitive to U.S. GDP growth.
- Mid-caps are poised to benefit from the “acceleration of production on-shoring” and domestic capital raising activities by U.S. companies (which favors cyclical sectors like industrials, financials and materials).
- Mid-caps are under owned.
The article speculates on the lack of enthusiasm for mid-caps as follows:
- The perception that mid-cap active managers are a “better bet”—that is, because the stocks are less liquid and less researched, there is an informational advantage that active managers can pursue. In reality, however, mid-caps are not that much less liquid and “should be just as efficient at capturing some extra return.”
- Mid-caps are viewed as less appealing because they are “boring and value oriented.”
- Compared to the growth hopes for both large- and small-caps, mid-caps are “neither fish nor fowl. They are not scale-based leviathans nor tiny acorns. And thus, when they are explained to clients, they seem rather lacking in the narrative department.” This is exacerbated by the fact that there isn’t a lot of economic data specifically related to mid-caps.
“Add it all up and one can easily understand why mid-caps are under owned,” the article concludes, adding, “The numbers don’t lie about performance, but behavioral biases get in the way.”
Get Full Access to VALIDEA Today
Invest Using Proven Quantitative Strategies – Risk-Free Trial.
Free Report on Systematic Investing
Get a free systematic investing guide, which explains how systematic investing works.
See the stocks part of the S&P 500 and have increased their dividends in each of the past 25 years.