Pop quiz: Which corner of the domestic stock market has seen the highest returns in the past 15 years -- small-caps or large-caps? The answer is neither! Mid-cap stocks have actually outperformed both their smaller and larger competition in that timeframe. While the small-cap-focused Russell 2000 Index has posted a 7.7% annualized 15-year return and the S&P 500 clocks in with a 6.9% showing, the Russell Midcap Index has produced a 9.9% annualized gain.
That means investors who are giving short shrift to the midsection of the domestic stock market are likely leaving money on the table. There are a handful of first-rate actively-managed mutual funds that focus on the mid-cap market, but it can be very difficult for the average investor to identify those funds, and even more difficult to stick with them during their inevitable periods of underperformance. So if you're not up for the game of trying to out-guess the market, exchange-traded funds are probably a safe bet for you. Fortunately, there are some very inexpensive and well-diversified mid-cap funds out there that you can draw on.
Finding middle ground
If you're looking to gain exposure to a wide swath of the mid-cap market, two of the cheapest options on the market are Schwab U.S. Mid-Cap ETF
Two other solid options with slightly longer track records are iShares Russell Midcap ETF
Of course, if you want to zero in more closely on a certain segment in the mid-cap space, there are style-specific ETFs that you might want to consider. If you're a value-seeker, two good options are the Vanguard Mid-Cap Value ETF
For investors looking to home in on more growth-oriented securities, Vanguard Mid-Cap Growth ETF
The past is not the future
And while all diversified investors should have at least some mid-cap exposure, whether through a dedicated mid-cap mutual fund or through owning small- and large-cap funds that stray over into mid-cap territory, folks should moderate their expectations for the future a bit. It's not a sure bet that mid-caps will once again beat the pants off of small- and large-cap stocks over the next decade and half. In fact, because they have done so well in recent history, there is more of a chance that returns will moderate a bit going forward. In fact, I think it's likely that large-caps will be the winner in the next few years.
However, over the long run, a solid mid-cap allocation is key to building an appropriately diversified portfolio. If you're a more aggressive investor with several decades left until you need your money, a 15% dedicated mid-cap allocation is probably a good target to aim for. If you're in retirement, a 5%-7% allocation is likely more appropriate. Whatever the right number is for you, make sure the middle ground of the market has adequate representation in your portfolio.