When it comes to choosing stocks, there are an infinite number of ways to narrow down the universe of potential candidates. Many investors often turn to companies that they know or have heard about from a close friend or acquaintance. Others are interested in companies with a certain combination of hype surrounding their growth prospects.
Of course, there is no shortage of romanticized dreams where investors choose the next high-flyer and then cash out with a massive profit. Perhaps this is why many investors are drawn to meme stocks, early-stage startups, recent IPOs, tech, biotech, mining, etc. More sophisticated investors look to screening tools, discuss with an advisor, or scour research reports to identify how to adjust their holdings.
Regardless of the method used for choosing investments, one market segment that tends to be underfollowed between both retail and institution investors is mid-cap stocks. For whatever reason, this is the only market-cap segment that saw a decline in the number of mutual funds between 2003 and 2018, which suggests that this group offers plenty of opportunities for those who are willing to do their own research.
- A mid-cap is a medium-sized business that has moved beyond the typical types of survival risks associated with early-stage development.
- Investors can use any combination of factors to narrow down the mid-cap universe to find potential investment candidates.
- Many investors turn to the holdings of exchange-traded funds (ETFs) that are specifically designed to track mid-cap companies.
For those who aren't aware, mid-cap companies are those in the market that typically have a market capitalization between $2 billion and $10 billion. For many investors, this segment is often regarded as the sweet spot of the market because the companies are relativity well established and are in the middle part of the business cycle. This means that most companies have moved beyond the typical survival risks that are commonly associated with early-development or startup-type companies. One reason that this group could tend to be underfollowed in comparison to their small-cap or large-cap counterparts is that mid-caps are seen as being less lucrative and often conduct business in sectors such as industrials, financials, materials, and consumer discretionary.
However, looking at historical returns, the mid-cap segment tends to perform quite well in comparison to small and large caps. For example, between December 1994 and May 31, 2019, the S&P Midcap 400 Index has beaten the S&P 500 and the S&P SmallCap 600 by an annualized rate of 2.03% and 0.92%, respectively. This strong level of performance suggests that the mid-cap segment is a prime contender for future investment.
Given the breadth of the mid-cap universe, it can often be intimidating to figure out where to start doing research. Different styles of investing will lead investors down different paths and lead to different results. As a starting point, some investors may want to consider checking out the top holdings of exchange-traded funds (ETFs) designed to track the broad mid-cap segment to help narrow down the field. In this article, we've chosen to look at holdings that appear in the holdings of the top five mid-cap-targeted ETFs based on total net assets to help give you an idea of how to get started with this type of research.
As mentioned, there are many mid-cap-focused ETFs, and investigating the top holdings of any of them is a good way to start doing research in this segment. Some ETFs are geared toward certain styles or factors. For the purposes of this article, we'll look at the holdings of these five popular funds ranked by their total net assets:
Top Holdings of Mid-cap ETFs
Mid-cap targeted ETFs are often structured to provide returns that closely match an underlying benchmark such as the S&P 400, Russell Midcap Index, or CRSP Mid Cap Index. As a result, the top holdings will also be expected to be represented with a relatively high ranking within these benchmarks.
When conducting investment research, the constituents of major benchmarks such as those that track key market segments, styles, or sectors also provide investors with a great source of potential investment candidates.
It is important to remember that the top holdings are constantly in flux and can change on any given day depending on the news. With that in mind, below is a snapshot of popular mid-cap companies based on data that was available in early April 2022. Companies that had the greatest number of occurrences within the list of ETFs were the ones that were selected for this list. In the case of the stocks below, each company was represented in three out of the five ETFs, or 60%.
· Occidental Petroleum Corp. (OXY)
· Motorola Solutions Inc. (MSI)
· Kroger Co. (KR)
· Arthur J Gallagher & Co. (AJG)
· Nucor Corp. (NUE)
· Carrier Global Corp. (CARR)
· Valero Energy Corp. (VLO)
· Corteva Inc. (CTVA)
Top Mid-cap Stocks Based on Capital Invested
Looking at the top holdings of the popular ETFs for a candidate that is common between them is one way to find potential investment candidates. Another method is to look at the amount of capital that is invested in each of the holdings and then rank the list by those that have the highest amounts as a rough idea of the amount of skin in the game.
In the case of the list below, the market values of the top 50 holdings of each of the five mid-cap ETFs listed above were tallied and then sorted in descending order. This list shows the top 10 holdings across the five funds based on market value. Again, keep in mind that this is based only on a snapshot in time. Specifically, the holding data for IJH, IWR, and MDY was based on market values from April 5, 2022. Market values of holdings for VO and VOE were as of Feb. 28, 2022.
· Palo Alto Networks Inc. (PANW): $1.43 billion
· Pioneer Natural Resources Co. (PXD): $1.35 billion
· Occidental Petroleum Corp. (OXY): $1.35 billion
· Carrier Global Corp. (CARR): $1.32 billion
· Corteva Inc. (CTVA): $1.31 billion
· Nucor Corp. (NUE): $1.29 billion
· Motorola Solutions Inc. (MSI): $1.28 billion
· Welltower Inc. (WELL): $1.25 billion
· Synopsys Inc. (SNPS): $1.23 billion
· Fortinet Inc. (FTNT): $1.23 billion
The Bottom Line
The mid-cap segment of the market tends to be underfollowed and it can be daunting for the average investor to narrow down potential mid-cap investment candidates. One way to narrow down the list of potential candidates is by investigating the top holdings of popular mid-cap ETFs such as those discussed above. Two particularly interesting options are for investors to focus on companies that tend to appear across several different funds or to sort by the market value of each holding to get a sense of where fund managers see opportunity.
What's the Best Way To Invest in Mid-cap Companies?
Investors can utilize any combination of quantitative and qualitative factors to narrow down the mid-cap universe to find potential investment candidates. Many investors also turn to the holdings of ETFs that are specifically designed to track mid-cap companies.
Why Do Some Holdings Within a Mid-cap ETF Have a Market Cap Higher Than $10 Billion?
Often, holdings of mid-cap funds that have the highest weightings, or amount of capital invested, tend to have market caps higher than what is most commonly referred to as a mid-cap ($2 billion to $10 billion). First, the specified range mentioned is subjective and might not be the range that is used by fund's managers when making selections. Second, strong performance by a given component since the time it was added to the fund is another main reason why the market cap is larger than many expect. Due to the changing nature of the markets, some mid-caps will eventually move up and become part of large-cap indexes, or conversely fall below the range of formally being called a mid-cap. The holdings of mid-cap ETFs will change to account for these types of fluctuations.
What Is a Mid-cap Company?
A mid-cap company is one that typically has a market capitalization between $2 billion and $10 billion. While the exact definition is subjective, the key takeaway is that a mid-cap is a medium-sized business that has moved beyond the typical types of survival risks associated with early-stage development. Conversely, mid-cap companies are on the path toward becoming part of the relatively small number of large-cap companies but aren't quite there yet.