Middleweights punching above the heavyweights

In 2017, the S&P/ASX MidCap 50 Index returned 22.06% almost double the returns of the S&P/ASX 200 Accumulation Index. Last year was not an aberration, over one, three, five and fifteen years the S&P/ASX MidCap 50 Index has the highest returns compared to the broad, large and small-cap S&P/ASX indices

Mid-caps

Mid-caps offer the best of both small and large-caps. They represent a mix of established and still developing companies and a good balance between the energy and youth of small-caps and the stability of large companies.

There are several reasons mid-caps are often referred to as the ‘sweet spot’ of the Australian stock market:

This is where M&A happens. For example: David Jones, iiNet, Qube, Tabcorp etc;
Capital expenditure is generally higher. Mid-caps tend to reinvest more in their business than large-caps;
More agility. Due to their size mid-caps are able to respond more quickly to growth opportunities; and
Room for growth. Mid-caps often experience higher revenue and net income growth than large-caps.

Performance

In 2017, the S&P/ASX 200 Accumulation Index rose 11.80% – dragged down by the Top 20 which rose just 7.28%, as measured by the S&P/ASX 20 Index.

In contrast, the S&P/ASX MidCap 50 Index led the pack when it came to investment returns. This has held over time. Over the past 15 years to 31 December 2017, the S&P/ASX MidCap 50 Index outperformed both Australian large and small-cap indices, as the chart below shows.

MVE performance

The following table shows the performance of the S&P/ASX MidCap 50 Index in comparison to other key S&P/ASX indices over the fifteen years to 31 December 2017. The S&P/ASX MidCap 50 Index delivered the best performance over one, three, five and 15-year periods.

MVE 2017 performance

Diversity

With a broad mix of technology players, healthcare stocks, consumer discretionary companies and others, the mid-cap sector has greater exposure to a wide range of growth industries, with no single sector dominating. That is a sharp contrast to the S&P/ASX 200 Accumulation Index, where the big four banks and Macquarie Bank represent nearly one third of the index.

So if your portfolio is invested in a broad market cap strategy tracking indices such as the S&P/ASX 100, 200 or 300, you are not getting much exposure to the growth potential of mid-caps – but overexposure to the top 10.

The chart below illustrates the percentage of exposures to the top 10 and mid-cap 50 stocks in portfolios tracking the S&P/ASX 300, 200 and 100 indices.

MVE concentration

The chart below illustrates the greater sector diversity of the S&P/ASX MidCap 50 Index compared to the S&P/ASX 200 Index.

MVE Sector

The VanEck Vectors S&P/ASX MidCap ETF (ASX: MVE) is the only ASX ETF which tracks the S&P/ASX MidCap 50 Index.

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