investing

Buy Mid Caps on the Cheap

In spite of a rocky 12 months, mid-cap stocks are in a market sweet spot. And investors should consider snapping them up.

Good news for fans of the Kiplinger ETF 20: Following the latest salvos in the brokerage price wars, customers at practically every major online broker can now purchase all 20 of the exchange-traded funds on our list commission-free. Still, investors are unlikely to look back fondly on free trades if the funds they buy post lackluster results.

Take iShares Core S&P Mid-Cap (symbol, IJH), which after an up-and-down 12 months for stocks is among the worst performers on our list. Its –2.6% return lags the large-company Standard & Poor's 500-stock index by 6.9 percentage points over that period. In one sense, that's to be expected. Stocks with midsize market capitalizations (share price times shares outstanding), typically between $2 billion to $10 billion, tend to fare worse than larger names during market downturns, says BlackRock ETF strategist Elizabeth Grenfell. "Large caps by their nature tend to hold up better during periods of volatility, thanks to their size and the stability of their cash flows," she says.

Baked into the one-year results is a particularly nasty downturn from mid September through late December 2018, when the S&P Mid-Cap 400 index, the benchmark that iShares Core S&P Mid-Cap tracks, fell into bear-market territory with a loss of 21%. Mid caps have been slower than their large-company counterparts to recover, and they still haven't made it all the way out of the hole.

But the lag in mid caps presents investors with the chance to buy good stocks relatively cheaply, says Brian Andrew, chief investment officer for wealth management firm Johnson Financial Group. He says mid caps are in a market sweet spot, capturing the fast growth potential of ascending small firms combined with the financial maturity of larger companies. The potential for mid caps to excel has been borne out historically: From 1994 through May 2019, the annualized return of the S&P Mid-Cap 400 has bested comparable small-cap indexes by 0.9 percentage point and large-cap indexes by 2.0 points. Stocks in the mid-cap index currently trade at 16.7 times projected earnings over the next 12 months, compared with a multiple of 17.2 for the S&P 500.

The best way to invest. Andrew re­commends that investors use the breakdown of the broad market's capitalization as a guide for their domestic stock allocation, with roughly 70% of assets in large caps, 20% in mid caps and 10% in small caps. The iShares ETF is among the most inexpensive and highly diversified mid-cap funds, charging just 0.07% of assets for ex­posure to some 400 stocks.

Most Popular

The 15 Best Stocks for the Rest of 2022
stocks to buy

The 15 Best Stocks for the Rest of 2022

The lesson of the past two years: Be ready for anything. Our 15 best stocks to buy for the rest of 2022 reflect several possible outcomes for the seco…
June 21, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Retirement Comfort: How to Avoid Running Out of Money
retirement planning

Retirement Comfort: How to Avoid Running Out of Money

When it comes to retirement planning, one thing all of us worry about is whether we will have enough money to last. Financial professionals can help y…
June 25, 2022

Recommended

Move Over ETFs: Direct Indexing Is an Investment Strategy Worth Paying Attention to
investing

Move Over ETFs: Direct Indexing Is an Investment Strategy Worth Paying Attention to

More flexibility, more control, the potential for higher returns and tax-reducing strategies: With pros like that, could direct indexing be right for …
June 25, 2022
Should You Prefer Preferred Stocks?
ETFs

Should You Prefer Preferred Stocks?

Preferred stocks and preferred stock ETFs may serve as a steady hand for income investors in an uncertain market.
June 23, 2022
Smart Investing in a Bear Market
investing

Smart Investing in a Bear Market

Here's how to make the most of today’s dicey market.
June 22, 2022
Dogs of the Dow Are 2022's Best in Show
dividend stocks

Dogs of the Dow Are 2022's Best in Show

Some of the best investments for income investors in a volatile 2022 have come from the Dogs of the Dow.
June 22, 2022