When I invest in exchange-traded funds (ETFs), I generally intend to hold them for the long haul. I use the same thought process when investing in individual stocks, but changing industry landscapes or company-specific setbacks can make jumping ship a better option than staying on a sinking boat. With broad ETFs, that's not usually a concern, because many companies are doing the heavy lifting.
One stock that has been a staple in my portfolio is the Vanguard Mid-Cap ETF (VO +0.07%). The main reason I continue to buy VO with no intention of selling is that I believe a truly well-rounded portfolio should include companies of all sizes, because each has its own advantages.
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The sweet spot between stability and risk
There will inevitably be volatility regardless of what kind of stock you're investing in, but one of the advantages of investing in large-cap stocks is the relative stability that comes with them. These companies are often well-established industry leaders and have the financial resources to weather most economic storms.
The selling point of investing in small-cap stocks is the growth opportunities they offer due to their relatively small size. With this growth opportunity comes extra risk because their operations are more sensitive to the broader environment. But again, that's the trade-off you make.
Mid-cap stocks are the sweet spot between the two. These companies are generally large enough to have proven business models and consistent cash flow, yet they're small enough that there are still plenty of growth opportunities available to them if they decide to expand into new markets versus continuing to operate in a lucrative niche.
NYSEMKT: VO
Key Data Points
Don't make decisions based on short-term performance
Since VO's January 2004 inception, its returns have almost mirrored the S&P 500's (^GSPC +0.19%), up 488% compared to the S&P 500's 490%. Over the past decade, the S&P 500 has noticeably outperformed VO, largely due to the growth in megacap stocks, but that hasn't made me abandon my routine VO investments.
My focus isn't on chasing gains; it's about keeping a diversified portfolio that allows me to benefit from different economic environments. In the case of mid-cap stocks and VO, they tend to outperform the market during periods of early to-mid economic expansion.
On the other hand, large-cap stocks tend to take the lead later in the cycle, when growth stabilizes, while small-cap stocks tend to flourish in the very early stages of the cycle, when rate cuts and optimism make it easier for investors to stomach risk.
In addition to an S&P 500 ETF and a small-cap ETF, VO will remain a staple in my portfolio. I'm intentional about not making it the bulk, but it serves its purpose well.
