What Is a Midcap Fund?

A midcap fund is an investment fund that focuses on companies with a market cap in the middle range of listed stocks. Companies with market capitalizations ranging from $2 billion to $10 billion are typically considered midcap companies.

KEY TAKEAWAYS

  • A midcap fund is an investment fund that focuses on companies with a market cap in the middle range of listed stocks.
  • Overall, midcap companies tend to offer more growth potential than large cap stocks with less volatility than the small cap segment.
  • By investing in a midcap fund, investors can capture the growth potential of midcaps without company-specific risks.

Understanding Midcap Funds

Midcap funds provide a diversified portfolio of midcap companies for investors. Midcap stock funds invest in firms with established businesses. Therefore, these companies have made equity capital markets a substantial part of their capital structures. Overall, midcap companies tend to offer more growth potential than large cap stocks with less volatility than the small cap segment. Midcap funds seek to capitalize on this capital appreciation potential by creating funds that are diversified among midcap companies.

Many fund companies and indexes focus on midcap stocks with an additional component, such as growth or value. Midcap funds can be actively managed or passively managed. The midcap segment of the market offers a wide range of investment options for investors. Some of the midcap segment's most popular benchmarks are the S&P MidCap 400, the Russell Midcap Index, and the Wilshire US Mid-Cap Index. As of June 2019, the smallest member of the Wilshire US Mid-Cap Index was valued at $1.4 billion. The largest had a market cap of $14.3 billion.

Benefits of Midcap Funds

Midcap funds have some advantages over both individual midcap stocks and other fund types. While less volatile than small cap stocks, holding only a few midcaps is usually much riskier than holding several large cap stocks. By investing in a midcap fund, investors can capture the growth potential of midcaps without company-specific risks.

Midcap funds can follow a somewhat different pattern than either large or small stocks. That makes midcap funds useful for portfolio diversification. Historically, there have been long periods when either large or small stocks outperformed. Choosing a midcap fund can prevent investors from going too far in the wrong direction.

Criticism of Midcap Funds

By investing in a midcap fund rather than holding individual midcap stocks, investors can miss out on massive gains. In particular, the CAN SLIM system developed by William J. O'Neil is often applied successfully to midcap stocks. The idea is that winning stocks can be spotted on their way up through the small caps. By the time stocks reach the midcaps, the speculators are ready to profit. For example, O'Neil flagged Netflix (NFLX) as a top pick in 2009. However, most investors are less successful at picking winners.

Examples of Midcap Funds

Below are examples of some of the market’s top midcap funds.

BlackRock Midcap Growth Equity Fund (BMGAX)

The BlackRock Midcap Growth Equity Fund is an actively managed mutual fund. It seeks to invest in midcap companies from the Russell Midcap Growth Index that it believes have superior growth characteristics. As of October 25, 2019, it had a year to date net asset value (NAV) return of 27.94%. The fund is benchmarked to the Russell Midcap Growth Index, which had a return of 27.26%. The fund had a gross expense ratio of 1.30% and a net expense ratio of 1.05% for A-shares.

Vanguard Mid-Cap ETF (VO)

The Vanguard Mid-Cap ETF is one of the largest passive index funds in the midcap market segment. The fund uses an index replication strategy to track the holdings and performance of the CRSP U.S. Mid Cap Index. As of October 25, 2019, the fund had a year to date NAV return of 24.01%. The fund had an expense ratio of 0.04%.