Investors often overlook mid-cap stocks—those with market capitalizations betweeen $2 billion and $10 billion—in favor of stable large caps or rapidly growing small caps. But mid-caps can offer the best of both worlds, being both more stable than smaller companies and more capable of outsized growth than larger ones. Notably, many mid-cap stocks have rebounded to start the second quarter of 2022, providing investors a fresh opportunity to diversify into this space.
- Investors often overlook mid-cap stocks, which may present strong return opportunities.
- Analysts have pointed to a resurgence in mid-cap stocks following volatility in recent months.
- Mid-cap stocks may benefit from favorable government policies, strong valuations, and broader global economic recovery as the COVID-19 pandemic eases.
Rebounding Following Volatility Related to Russia
The ongoing Russian invasion of Ukraine battered stocks across the market cap spectrum with increased volatility. But in recent weeks mid-cap stocks have begun to rebound, potentially outpacing other groups of stocks.
New Investors May Help
One potential reason for the surge in mid-cap stocks heading into the second quarter of 2022 is that new investors continue to enter the markets in spite of these corrections. Large-cap stocks may have remained affected by the Russia-Ukraine crisis as a result of sales by foreign institutional investors (FIIs).
Government Policies Support Growth
U.S. administrative policies advocating for development of infrastructure, renewable energy, and electric vehicles have also contributed. These policies, such as the March 2022 launch of the Task Force on Energy Security, could bolster cyclical industries like industrials and materials. Many of these industries are well represented by mid-cap stocks.
Mid-cap stocks are poised to benefit from the reopening of economies around the world as the COVID-19 pandemic disrupts daily life to a lesser degree.
Strong Valuations, Earnings Growth
Another factor benefiting mid-caps could be their attractive valuations relative to large-cap stocks. Consistent earnings growth in many mid-cap companies and the success of mid-cap initial public offerings (IPOs) in 2022 have also fueled a strong rebound that has outpaced some larger companies.
Why are mid-cap stocks thriving?
There are many potential explanations why some mid-cap stocks have done well, including new investor interest, favorable governmental policies, strong valuations, and broader economic recovery following the strongest impact of the COVID-19 pandemic.
How can I take advantage of mid-cap performance?
Investing in individual mid-cap stocks is always an option. But investors looking for broader exposure to this part of the market cap spectrum may save time and minimize risk by looking to mid-cap exchange-traded funds (ETFs).
What are risks of mid-cap stocks?
Many of the risks of investing in mid-cap stocks are similar to those across market capitalizations. These include macroeconomic risks, competition risks, and company-specific risks. Although they are larger than small-cap stocks, mid-caps also tend to lack the stability of larger companies.
The Bottom Line
Investors not already in the mid-cap space may find value in diversifying in this area in 2022. Doing so by investing in targeted mid-cap exchange-traded funds (ETFs) such as the Vanguard Mid-Cap ETF (VO) or the iShares Russell Midcap ETF (IWR) help to increase diversification while minimizing the risks associated with holding individual names.