Should an investor look to small, medium, or large cap ETFs as part of their investment portfolio? The answer is all of the above. The highly regarded French Fama research has recommended for some time that you should utilize a total stock market approach while adding a small allocation to small cap value to your portfolio. Their research showed over time that small has led large and value has led growth over long time horizons. What this research and many others in academia as well as investors have overlooked, however, is the out-performance of mid caps over a long time horizon. According to a July/August 2009 article in the Wealth Manager publication by J. Gibson Watson III of Prima Capital, mid cap stocks outperformed their smaller and larger brethren over the past 30 years - while being only slightly more volatile than large caps and having a better risk/reward profile than small caps.
Looking back over the last 3 years, my independent research shows that mid caps have again shown fine long term performance when compared to large or small caps. The following tables show clearly that mid cap stocks and indexes should be considered by investors looking for market beating returns.
BLEND STYLE/SYMBOL/2009/2010/2011 RETURNS
iShares S&P 500 Index
iShares S&P MidCap 400 Index
iShares S&P SmallCap 600
GROWTH STYLE/SYMBOL/2009/2010/2011 RETURNS
iShares S&P 500 Growth Index
iShares S&P MidCap 400 Growth
iShares S&P SmallCap 600 Growth
VALUE STYLE/SYMBOL/2009/2010/2011 RETURNS
iShares S&P 500 Value Index
iShares S&P MidCap 400 Value
iShares S&P SmallCap 600 Value
While it should be common sense that no particular style or size index will always be the top performer, it is obvious from the charts that the mid cap growth area has shown above average returns, compared to the standard market averages over the last 3 years. What is interesting about this outperformance is that even in the same style/size category there have been at times significant differences in performance. One standout in the midcap growth area is Rydex S&P Midcap Pure Growth (NYSEARCA:RFG).
Midcap Growth STYLE/SYMBOL/2009/2010/2011 RETURNS
Rydex S&P Midcap Pure Growth
iShares S&P MidCap 400 Growth
Vanguard Midcap Growth
There are several clear reasons that Rydex S&P Midcap Growth, iShares S&P Midcap 400 Growth, and Vanguard Midcap Growth have different returns while in the same class. Of particular note, RFG tracks the S&P Midcap 400/Citigroup Pure Growth Index, IJK tracks the S&P Midcap 400/Barra Growth Index, and VOT tracks the MSCI US Midcap Growth Index. RFG's top 10 holdings at this time include Equinix (NASDAQ:EQIX), United Therapeutics (NASDAQ:UTHR), Alliance Data Systems (NYSE:ADS), Regeneron Pharmaceuticals (NASDAQ:REGN), Catalyst Health Systems (NASDAQ:CHSI), Triumph Group (NYSE:TGI), Mednax (NYSE:MD), Amerigroup (AGP), Strayer Education (NASDAQ:STRA), and ITT Educational Services (NYSE:ESI). RFG has no common top 10 holdings with IJK or VOT, with Green Mountain Coffee Roasters (NASDAQ:GMCR) as the only common top 10 holding of IJK and VOT. Probably the most telling difference between the 3 Midcap Growth ETFs are the top 5 sector weightings.
Consumer Service (19.73)
Consumer Goods (14.78)
Consumer Service (13.57)
Consumer Goods (11.93)
Oil and Gas (12.37)
With the variability in performance even within the same size and style ETF, it makes sense to me that it is worthwhile to spend the time to research the makeup of the ETFs that you are considering for inclusion in your portfolio. While many still hold to the efficient market theory as well as buy and hold, it does appear that it is possible to have market beating returns without taking on unbearable risk. One could have done much worse than finding a mid-cap growth ETF, and holding it for the last 3 years.