The S&P/ASX MidCap 50 was up 5.35% in February, outperforming the S&P/ASX 50—which posted 0.25%—by more than 5%. This was the largest relative outperformance of the mid-cap segment compared to large caps in a single month since October 2008.

A closer look at Australian midcaps, as measured by the S&P/ASX MidCap 50, shows the segment offers less concentration at the constituent and sector level compared to both large-cap and broad market indices.

The S&P/ASX MidCap 50 excludes the big four banks and large mining companies, which are well known for their large representations in the large-cap S&P/ASX 50 and the broader S&P/ASX 200.

The representation of Financials within the S&P/ASX 50 has grown to over one-third of the index’s weight, with 5 of the top 10 companies in the index coming from this sector, while the Materials sector accounts for nearly a quarter of the index’s weight. Meanwhile, the Financials and Materials sectors collectively make up over 50% of the S&P/ASX 200, while representing less than one-third of the S&P/ASX MidCap 50.

With less weight in Financials and Materials, the S&P/ASX Midcap 50 offers more representation to the Industrials sector, as well as companies that may benefit from technological advancements and disruptive innovations within the Information Technology and Communication Services sectors.

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The Mid-Caps Segment Has Become More Distinct over the Past 12 Months

Market movements and constituent turnover at rebalance periods over the past 12 months have resulted in the sector composition of S&P/ASX MidCap 50 becoming more differentiated than the S&P/ASX 50 and S&P/ASX 200. For example, the S&P/ASX MidCap 50 has added around 5% to both the Industrials and Information Technology sectors and 3% to Communication Services. Meanwhile, the index weight of companies within the Materials and Energy sectors has decreased.

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The S&P/ASX MidCap 50 is also much less concentrated than the large-cap and broad market indices. For the S&P/ASX 50 and S&P/ASX 200, the top 10 companies represent 60% and 48% of the index weight, respectively, with Financials accounting for half of the top 10 weight in both indices. In contrast, the top 10 companies in the S&P/ASX MidCap 50 comprise less than 35% of index weight, with a more diverse sector spread.

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Mid-Cap Equity Risk Premium Has Been Rewarded Historically

Both bottom-up and top-down factors can drive stock market performance. In economic environments led by macro factors such as rising or falling rates or boom and bust commodity cycles, the mid-cap segment has historically demonstrated differentiated performance characteristics versus large caps and the broader market.

The S&P/ASX MidCap 50 underperformed the S&P/ASX 50 by more than 5% in 2023, which was a period characterized by rising interest rates, where investors valued quality and dividends offered by more established large caps. However, over a full economic cycle, as shown by the 5- and 10-year performance figures, the mid-cap segment has outperformed large caps and the broad market (see Exhibit 4).

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Large Caps Were More Correlated to Small Caps on a Three-Year Basis

Historically, correlations between segments have increased during macro-driven markets, such as the 2008 Global Financial Crisis and the more recent COVID-19 pandemic. Correlations are still elevated on a rolling three-year basis, which includes the COVID-19 recovery rally. However, we are starting to see more deviation among returns entering the 36-month window, resulting in a recent reduction of large- versus mid-cap correlations, and interestingly, lower than the large- versus small-cap correlation.

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