What is the S&P MidCap 400 Index?
The S&P MidCap 400 is an index published by Standard & Poor's. The index comprises 400 companies selected as broadly representative of companies with midrange market capitalization (market valuation of between 200 million and 5 billion). The S&P MidCap 400 is one of several leading Standard & Poor's indexes that investors use as a gauge for market performance and directional trends in U.S. stocks.
- This index is a market-capitalization-weighted index of the 400 U.S. publicly traded companies with midrange capitalization.
- It is a float-weighted index, meaning company market capitalizations are adjusted by the number of shares available for public trading.
- The index is the most widely followed midcap index so there are several funds designed to track the performance of this index.
- The midcap index reflects the same sector groupings as the S&P 500 index.
Understanding the S&P MidCap 400 Index
The S&P MidCap 400 Index tracks the performance of companies considered to be in a middle range of market capitalization, as distinguished from other companies considered to be "large cap" (above 5 billion in market valuation) or "small cap" (below 200 million in market valuation).
The index is a market-cap weighted index, meaning that the larger the market valuation, the more influence that individual stock has on the index. The formula for weighting each company in the index is calculated by taking the market cap for the individual company and dividing it by the total of all 400 company market caps in the index. This has the effect of making the larger capitalized companies have more influence on how the index moves.
The general expectation among investors is that these companies should have more opportunities for growth in size and valuation, thus representing more potential reward to investors than large-cap companies. This expectation does not always materialize.
For example, from 2008 to 2018, the midcap S&P 400 outperformed the S&P 500 index and also spent most of that decade with better relative performance year to year. However, the previous 10 years to that, from 1998 to 2008, showed that the S&P 500 had better relative performance than the S&P midcap 400 index. One point of interest is that though the S&P fell roughly 53% from its open to its lowest point, the midcap index fell similarly, but at a 52% drop compared to the large cap index.
S&P 400 Composition
Because the S&P U.S. Indices are designed to measure the performance of U.S. stocks in various sectors and ranges, the midcap index is composed of stocks representing the major sectors. Standard and Poor's describes the selection methodology simply as being at the discretion of the selection committee with an attempt to represent the major GICS industry classifications.
Like many other stock market indexes, the S&P 400 MidCap Index is a capitalization-weighted index, meaning that the stocks with the largest market capitalization have the most significant impact on the movement of the Index. Similarly, smaller movements in the smallest companies in the Index have virtually no effect on the overall movement of the Index. This is an important fact to remember for investors seeking diversification, as market-cap weighted index funds primarily expose an investor to the movements of a small group of stocks, despite the broad name of the index itself.
The S&P 400 (as with other Standard and Poor's indexes) only uses free-floating shares, meaning the shares that the public can trade. The S&P adjusts each company's market cap to compensate for new share issues or company mergers. The value of the index is calculated by totaling the adjusted market caps of each company and dividing the result by a divisor. Unfortunately, the divisor is proprietary information of the S&P and is not released to the public.
However, we can calculate a company's weighting in the index, which can provide investors with valuable information. If a stock rises or falls, we can get a sense as to whether it might have an impact on the overall index. For example, a company with a 10% weighting will have a greater impact on the value of the index than a company with a 2% weighting.