It’s easy for mid-cap companies (with values of approximately $2 billion to $10 billion) to get overshadowed in portfolio management by both the smaller and larger players around them that can hog the attention of the financial community. Sure, mid-cap stocks may offer less volatility than small caps – but the latter tend to be cheaper and potentially offer greater upside potential, as small companies have been more likely to enjoy drastic growth surges. And, sure, mid-caps may offer more growth potential than the more expensive large caps – but they have also carried more volatility than the established titans that can lend stability to both markets and portfolios.
Investing in funds may help mitigate risk in mid-caps
This mix of characteristics can make mid-caps a useful category for institutional investors with evolving risk appetites and outlooks. Some may foresee lesser returns and greater volatility ahead for small-caps in this new inflationary period, for example, or seek to lower their exposure to large-caps dominated by tech titans. Some investors will express these positions by choosing individual mid-cap companies that they believe are likely to outperform, but adding mid-cap exposure by selecting individual stocks brings inherent vulnerabilities, of course. If just a few equities markedly underperform, they could have an outsized negative effect on the portfolio.
Investing in mid-cap funds has long been a strategy to help mitigate these single stock risks. By holding many companies, mutual funds and ETFs can be somewhat insulated against volatility from the implosion of any single security while still benefiting from potential broad market gains. This can make funds a vital diversity tool for institution investors interested in adding mid-cap exposure. And historically, the blend of attributes in the mid-cap market have allowed these funds to seek attractive returns.
ETFs may offer an even more efficient mid-cap solution
In choosing a fund type, ETFs may offer advantages over traditional open-ended mutual funds. They tend to have greater transparency and lower operating costs, for two. But the flexibility ETFs carry is the real factor. Whereas moving in or out of major positions can take days with mutual funds, ETFs can accomplish this with a single trade – and that’s critical for institutional investors when they need to react quickly to market information.
The Russell Mid-Cap Value Index is one of the most popular reference indexes for both mid-cap ETFs and mutual funds. Created in February 1995, it’s comprised of about 700 stocks from the larger Russell Midcap Index (and, ultimately, the Russell 3000 Index, which is designed to measure the performance of almost all U.S. companies), skewing toward stocks with lower price-to-book ratios and lower forecasted growth values in the wider pool of mid-caps.
The iShares Russell Mid-Cap Value ETF (IWS) offers exposure to this important segment of the market by seeking to track the Russell Mid-Cap Value Index. In addition to its utility as a diversification tool, IWS can help tilt a portfolio toward value stocks – companies that appear to be trading at attractive prices (or undervalued by the market relative to comparable companies).
Launched in July 2001, IWS spreads its top five exposures sector exposures across Financials, Industrials, Real Estate, Consumer Discretionary and Information Technology (as of October 26, 2021; see table below).
As of October 27, 2021, IWS had net assets of $14,552,242,357 and a 30-day average daily trading volume of $358,619 with 702 holdings.
See the chart below for more details. You can find more info on IWS here.
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Diversification and asset allocation may not protect against market risk or loss of principal. Buying and selling shares of ETFs may result in brokerage commissions.
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