This year, mid-cap stocks and the related exchange traded funds are, well, in the middle. Up 18.9% year to date, the $49.82 billion iShares Core S&P Mid-Cap ETF IJH, which tracks the S&P MidCap 400 Index, is beating the S&P SmallCap 600 Index while trailing the large-cap S&P 500.

What Happened

It's not unusual for mid-cap stocks to outperform their smaller peers and, over longer holding periods, middle stocks have made a habit of beating large caps, too.

“Mid-cap stocks have often been overlooked in favor of other size ranges in investment practice and in academic literature,” said S&P Dow Jones Indices in a recent note. “Yet mid-cap shave outperformed large-and small-caps, historically: the S&P MidCap 400 has beaten the S&P 500 and the S&P SmallCap 600 by an annualized rate of 2.03% and 0.92%, respectively, since December 1994.”

Adding to the case for mid-cap ETFs such as IJH is that these funds are often less volatile than small-cap equivalents. Over the past three years, IJH's annualized volatility is 210 basis points below that of the S&P SmallCap 600 Index.

Why It's Important

Even with the obvious benefits of mid-cap ownership, many investors, including professionals such as fund managers, remain under-allocated to the asset class.

“Based on overall market capitalization, we might expect funds to allocate twice as much to mid-caps compared to small-caps,” said S&P Dow Jones. “Instead, the aggregate core allocation to small-and mid-caps is approximately the same: investors appear to have a preference for small-caps over mid-caps in their core holdings.”

Mid-cap funds can also be avenues for reducing sector and stock-specific risk. For example, none of IJH's holdings exceed a weight of 0.75% and its largest sector of 16.35% (financials) is well below the largest sector allocation in the S&P 500 (technology).

What's Next

Fund managers underweight to mid-caps may come by way of there being a dearth of active mid-cap funds to choose from, further boosting the allure of inexpensive, passive products like IJH.

“Mid-cap was also the only category to report a decline in the total number of active funds between December 2003 and December 2018,” according to S&P Dow Jones. “Combined with an apparent under-allocation of mid-caps compared to small-caps in core allocations, Exhibit 3 suggests that mid-caps have not received the same level of investor interest as small-caps.”