Investors familiar with the stock market often recognize the advantages of index fund investing for its straightforward approach and tendency to outperform many individual stock picks. Large-cap index funds, such as the Vanguard S&P 500 ETF or the SPDR S&P 500 ETF Trust, which aim to track the S&P 500 index, are frequently recommended as foundational components of a portfolio. Yet, for investors seeking to optimize their portfolios, exploring beyond these popular options could be worthwhile. According to a focused analysis of mid-cap equities, Vanguard’s Mid-Cap ETF (ticker VO) emerges as a noteworthy alternative worth holding for the long term.
As its name indicates, the Vanguard Mid-Cap ETF is composed primarily of mid-cap stocks, typically those with market capitalizations ranging from approximately $2 billion up to $10 billion. This fund is designed to emulate the performance of the cap-weighted CRSP US Mid Cap index, which currently comprises around 290 companies. Comparable performance could also be derived from the S&P 400 MidCap index or similar exchange-traded funds tracking that benchmark, thus offering multiple avenues for acquiring exposure to mid-size companies.
For buy-and-hold investors, maintaining a position in a mid-cap ETF like Vanguard’s represents a strategic choice grounded in historical performance trends. Over time, such indexes have demonstrated a tendency to outperform the S&P 500, which traditionally dominates the large-cap segment. Although the S&P 500 experienced exceptional gains since 2020, notably propelled by a concentrated subset of large technology giants advancing artificial intelligence technologies, the mid-cap segment has steadily maintained an advantageous trajectory since its inception in 1991.
Examining historical data reveals that the S&P 400 MidCap index has consistently surpassed its large-cap counterpart in returns since its creation. This relative outperformance can be interpreted through the perspective of company life cycles. Mid-cap companies often find themselves positioned beyond the initial unstable startup phase and have not yet reached their maximum scale-related growth phase. They retain significant runway for expansion, especially if their offerings align with emerging market opportunities or innovative trends.
Illustrating this growth potential, companies such as UiPath, a player in artificial intelligence and robotics, have recently moved into the S&P 400 MidCap index. Additionally, firms like Robinhood Markets and Carvana have successfully grown beyond the mid-cap threshold to join the S&P 500, indicating their upward trajectory within evolving markets ripe for new entrants with innovative business models.
It is important to note that not all constituents of mid-cap indexes achieve notable success. Similar to larger indexes, some companies merely keep pace with their peers, and others may underperform to the extent they are eventually removed from the index. Nonetheless, the aggregate performance of the group remains strong, buoyed by the subset of outperformers that elevate the entire segment. This pattern has manifested consistently over time and may reasonably continue given sufficient investment horizons.
For investors seeking to incorporate mid-cap exposure without the challenges of individual company research and monitoring—which can be complex due to the less widespread coverage of mid-sized firms—a broad-based ETF approach encapsulated by Vanguard’s Mid-Cap ETF provides an efficient solution. This allows for diversification within the segment while capturing the associated growth and value opportunities inherent to mid-cap stocks.