Investing in Mid-Cap Companies: Pros and Cons

What investors need to know for growth and risk.

Fact checked by Amanda JacksonReviewed by Gordon ScottFact checked by Amanda JacksonReviewed by Gordon Scott

The relative size of a company is measured by its market capitalization, also known as market cap, which is equal to the total number of shares outstanding multiplied by its market price. Mid-cap companies commonly have a market capitalization of $2 billion to $10 billion and provide investors with opportunities for growth in well-known companies.

The S&P MidCap 400 is an index with a benchmark for mid-sized companies that measures the performance of 400 mid-sized companies.

Key Takeaways

• Mid-cap companies typically have a market capitalization between $2 billion and $10 billion.
• Market capitalization is the money it would take to buy all the company’s shares at the current market price.
• The S&P MidCap 400 measures the performance of 400 mid-sized companies.

What Is Market Capitalization?

Market capitalization represents the money it would take to buy a company’s shares at the current market price. It is a useful gauge of where the company fits size-wise relative to its peers or other public companies. As of early July 2024, the market capitalization of companies trading on the Nasdaq ranged from $2 million to more than $3 trillion.Common groupings include:

• Nano-cap: Market capitalizations of less than $50 million are called nano-cap.
• Micro-cap: Market capitalizations of $50 million to $300 million are called micro-cap.
• Small-cap: Market capitalizations of $300 million to $2 billion are called small-cap.
• Mid-cap: Market capitalizations of $2 billion to $10 billion are called mid-cap.
• Large-cap: Market capitalizations of $10 billion to $200 billion are large-cap.
• Mega-cap: Market capitalizations over $200 billion are considered mega-cap.

Why Invest in Mid-Cap Companies?

Data from the U.S. Bureau of Labor Statistics (BLS) shows that approximately 30% of new businesses fail within two years of opening. Worse yet, 45% fail during the first five years, and 65% fail during the first 10 years.Medium-sized companies have navigated the high-risk phases associated with startups and early market development. For investors, it can mean a lower level of investment risk and a proven level of staying power.

Companies ranging in size from $2 billion to $10 billion may seem large to small business owners, but these companies offer upside potential. Midsized companies can access cheaper forms of financing than when they were smaller. Increased capital means future growth through new lines of business, more employees, new offices, new equipment, or participating in corporate actions such as mergers or acquisitions. A buyout often comes at a significant premium to the market price and can provide a considerable return on investment.

Mid-Cap ETFs

Investors uninterested in researching and analyzing the broad mid-cap segment may want to consider investing in one or more of the targeted exchange-traded funds (ETFs). Fund options can be narrowed further for those who want to focus on growth, value, dividends, or momentum. Some examples include:

• SPDR S&P MidCap 400 ETF Trust (MDY)
• Vanguard Mid-Cap ETF (VO)
• iShares Russell Mid-Cap ETF (IWR)
• Vanguard Mid-Cap Value ETF (VOE)
• Vanguard Mid-Cap Growth ETF (VOT)
• iShares Core S&P Mid-Cap ETF (IJH)
• Invesco S&P MidCap Value with Momentum ETF (XMVM)

Tip

Mid-cap stocks are useful in portfolio diversification because they provide a balance of growth and stability.

Historical Performance

Historically, retail and institutional investors tend to underfollow the mid-cap segment across different size segments. Since 2003, small-, mid-, and large-cap stocks have outperformed 33%, 26%, and 41% of the time, respectively in any one-year rolling period.

However, the longer investors held mid-cap stocks, the more often they outperformed. Between 2003 and 2023, mid-caps outperformed small- and large-cap stocks 60% of the time with less associated risk. In 2024, JP Morgan anticipates that U.S. small and mid-cap returns will remain strong over a 10-to-15-year investment horizon, rivaling U.S. large caps.

Challenges for Mid-Cap Companies

Decades of effort are spent growing and nurturing a budding company. For a medium-sized business, management styles that serve a company well when smaller doesn’t necessarily work as well after it has grown. Demands from suppliers, investors, and employees, along with new forms of competitive market forces, change as the company grows.

For investors, mid-cap companies are less known than their larger-cap counterparts. In many cases, products of mid-cap companies are just starting to gain household recognition. What this means for investors is extra time spent on research and analysis. Some investors only look to buy into companies considered best of breed.

Why Does the Level of Risk Decline for Mid-Caps?

Risks associated with early growth are lessened because businesses are more established. This means that mid-caps are often ripe for significant growth opportunities with a reasonable level of risk.

Are Mid-Caps Candidates for M&A Activity?

Larger corporations may buy small and medium-sized companies to gain a comparative advantage but at a lower cost than it would take to implement the changes otherwise. This type of acquisition is known as a tuck-in acquisition or bolt-on acquisition. Generally, consumer products are more likely to be bolt-on acquisitions, while the tech sector employs more tuck-in acquisitions.

How Big Does a Company Need To Be in Order To Be Considered a Mid-Cap?

The market capitalization of mid-caps generally ranges from $2 billion to $10 billion. As of June 28, 2024, the constituents of the S&P 400 Index ranged from $1.26 billion to $20.87 billion.

The Bottom Line

The mid-cap segment of the market is relatively underfollowed by the investing public. In many cases, investors are more interested in well-known large caps or the lucrativeness of the up-and-coming small caps. However, mid-caps may provide investors with an opportunity for growth.

Read the original article on Investopedia.