Top Mid-Cap Financials

When investors are asked to think of the U.S. financial sector, the largest names such as JPMorgan Chase & Co. (JPM), the Goldman Sachs Group, Inc. (GS), Bank of America Corporation (BAC), and Citigroup Inc. (C), will often be the types of companies that automatically spring to mind. What is usually further down on the list of popular investment candidates are medium-sized players such as regional banks, diversified banks, and property and casualty insurance companies.

The group of financials that currently occupy the mid-cap segment have an average market capitalization of $5.66 billion and can range anywhere between $1.6 billion to $12.5 billion, as measured by the S&P MidCap 400 Index. In the case of large-cap financials, as represented by the holdings of the Financial Select Sector SPDR Fund (XLF), the average market cap is approximately $66 billion and will range from around $10 billion, which is the upper end of the mid-cap segment, up to $763 billion.

In this article, we look at several of the top financial companies from within the mid-cap range and discuss why this niche segment of the market deserves a closer look.

Key Takeaways

  • The mid-cap financial segment of the market offers investors a unique set of growth prospects with reasonable levels of risk.
  • The average market capitalization of a mid-cap financial company is $5.66 billion, with market caps ranging anywhere between $1.6 billion and $12.5 billion.
  • Mid-cap financials often outperform their large-cap counterparts during periods of rising prices, but they can also fall faster during bearish periods. This behavior is common in the mid-cap segment and is a risk factor that should be considered before investing.

Identifying Top Mid-Cap Financial Stocks

Investors who are interested in researching the mid-cap financials sector may want to consider checking into the holdings of an index such as the S&P MidCap 400 Financials. The index comprises 61 holdings from across the United States, which are also the holdings from within the broader S&P 400 Index that are classified as members of the Global Industry Classification Standard (GICS) Financials sector. For savvy investors, the 61 holdings can be screened based on any set of criteria that aligns with one's investment strategy, goals, and risk tolerance.

For the purposes of this article, we've gathered the top 50 holdings of the five most popular mid-cap exchange-traded funds (ETFs) based on net assets and then sorted the list based on the amount of capital invested into the companies from within the various sectors. The list below shows the top 10 financial companies based on allocated capital within these five funds:

·Arthur J Gallagher & Co. (AJG)
·Webster Financial Corporation (WBS)
· Alleghany Corporation (Y)
· First Horizon Corporation (FHN)
· Fifth Third Bancorp (FITB)
· Ameriprise Financial Inc. (AMP)
· MSCI Inc. (MSCI)
· Discover Financial Services (DFS)
· East West Bancorp Inc. (EWBC)
· American Financial Group Inc. (AFG)

Webster Financial Corporation (WBS)

Webster Financial Corporation (WBS) is a regional bank that provides financial services for clients in the northeastern part of the United States. Aside from offering the types of services common to commercial and consumer banking, the company has grown into one of the largest providers of employee benefits solutions. Webster Financial has a market capitalization of approximately $9 billion as of April 18, 2022, and has a strong track record of consistent dividend payments dating back to 1987.

Looking at the weekly chart below, you can see that the stock has handily outperformed the Financial Select Sector SPDR Fund (XLF), a popular ETF used to track the performance of the financials within the S&P 500, since 2008. Bullish investors would look for this type of strong relative performance to continue, while other types of investors, such as those that buy and sell based on chart patterns, may choose to wait for the performance of WBS to converge with that of the ETF. A pairs trading strategy would look to profit from a return to the type of divergence between the two assets that has been common since 2009. Regardless of one's investment strategy, the strong relative performance of this regional bank suggests that it could be worth a closer look.

Relative performance between Webster Financial Corp. and the Financial Select Sector SPDR Fund (XLF)

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Important

Investors can get broad exposure to the regional bank's subsector by investing in a targeted ETF such as the SPDR S&P Regional Banking ETF (KRE) or the iShares U.S. Regional Banks ETF (IAT).

East West Bancorp, Inc. (EWBC)

East West Bancorp, Inc. (EWBC) is a mid-cap full-service commercial bank with more than 120 locations in key cities within the United States and China. Fundamentally, the company has a market capitalization of approximately $10.6 billion and has posted compounded growth rates in total loans, total deposits, and total assets of 7%, 11%, and 10%, respectively, between Dec. 31, 2016, and Dec. 31, 2021. Strong growth in key metrics along with a modest market cap suggests that this financial stock will likely make its way onto the watchlists of both value and growth investors over the years ahead.

Looking at the weekly chart, it is interesting to note how the price has strongly outperformed during periods of rising prices but how it has also underperformed when prices were falling. This type of behavior is common for mid-cap companies in bearish market scenarios and is something for risk-averse investors to consider.

Relative performance between EWBC and XLF between 2011 and 2022.

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American Financial Group, Inc. (AFG)

American Financial Group, Inc. (AFG) has a long and proud history dating back to 1872, when it was founded as Great American Insurance Company. While its name may have changed, the company's focus on insurance has not. American Financial Group has a market capitalization of approximately $12.5 billion and has over 7,500 employees in approximately 120 office locations around the globe.

Looking at the weekly chart below, you can see that the stock has strongly outperformed the XLF ETF over the past decade. Again, like the case of East West Bancorp mentioned above, the stock price of American Financial Group has strongly outperformed during periods of rising prices, but it also carries higher volatility and sees periods of underperformance during bearish market scenarios, which is something to consider from a risk-management perspective.

Relative performance of AFG and XLF between during 2012 and 2022.

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The Bottom Line

When it comes to investing in the financial sector, most investor attention gets directed toward the largest names in the market. While investing in a relatively unknown medium-sized regional banks or insurance companies may not sound as appealing as owning shares of global investment banks, the relative performance of the group, as shown in the charts above, suggests that there are significant returns available to those who are willing to do the research and buy into stocks that fly under the radar.

What Types of Companies Come From the Financials Sector?

The financial services sector is made up of many smaller subsectors. Banks are the largest part of this segment, making up most of the sector. Remaining subsectors include insurance providers, capital markets, real estate investment trusts (REITs), consumer finance, and diversified financial services, to name a few.

Why Is the Financial Sector Important?

The financial sector comprises a broad range of industries including banks, investment companies, insurance companies, and real estate firms. Companies within this sector set the parameters for citizens and businesses when it comes to the terms around the borrowing and lending of capital. A strong financial sector is a sign of a healthy economy.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. S&P Dow Jones Indices. "S&P MidCap 400 Financials," Select "Characteristics."

  2. State Street Global Advisors. "The Financial Select Sector SPDR® Fund."

  3. Webster Financial Corporation. "About."

  4. Webster Financial Corporation. "Dividend History."

  5. East West Bank. "2021 East West Bank Annual Report," Page 1.

  6. East West Bank. "2021 East West Bank Annual Report," Page 25.

  7. American Financial Group, Inc. "Company Overview."

  8. American Financial Group, Inc. "Annual Report," Page 30.

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