Diversified ETFs are a great way to buy the total U.S. stock market. However, mid-cap and small-cap ETFs provide a way to focus on particular market segments .
"Mid caps are considered too big and safe for those seeking volatile small cap exposures, while they are often considered too risky and uncertain for those who want the stability of mega caps," Zacks Equity Research wrote.
Mid-cap stocks and ETFs are in a better position to mitigate risk since they have more room for growth and capital appreciation than large-caps, according to the report.
Plus, should any political instability impact the stock market later in the year, mid-caps can tolerate more market volatility than their smaller and larger counterparts. Recently, large-cap funds such as the SPDR S&P 500 (NYSEARCA:SPY) have seen outflows in the billions. Still, SPY has managed to gain 5.3% in 2013, signaling investor confidence in U.S. equities.
Long term, mid-caps haven been solid performers as they have outperformed both small-and large-cap stocks over a five-year period and year-to-date, reports Zacks. The iShares Core S&P Mid-Cap ETF (NYSEARCA:IJH) has returned about 4% this year.
Other mid-cap ETFs:
iShares Core S&P Mid-Cap ETF
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Small-cap stocks are able to capture the activity of a local economy while spreading out exposure, according to Zacks, but they are able to expose investors to more growth than large- or mid-caps. Small-caps are known for higher levels of volatility due to their size and the fact that the companies are relatively unstable in relation to larger-caps companies. The iShares Russell 2000 Index Fund (NYSEARCA:IWM) has returned about 3% this year and has outperformed SPY by 100 bps in 2013.
iShares Russell 2000 Index Fund
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon's clients own SPY and IWM.
Disclosure: I am long IWM, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.