Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
SovereignInvestor
Posts: 630
Joined: Mon Aug 20, 2018 4:41 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by SovereignInvestor »

In 1999 S&P was at 25 forward PE while mid caps were undetermined 20. That explains that out performance from 2000 to present.

The out performance in 1970s is interesting. It can't be explained by mid caps being riskier because mid caps best small caps.
TomCat96
Posts: 1040
Joined: Sun Oct 18, 2015 12:18 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by TomCat96 »

Dave55 wrote: Mon May 20, 2019 1:21 pm
Mel Lindauer wrote: Mon May 20, 2019 1:09 pm
pdavi21 wrote: Mon May 20, 2019 12:27 am The real question is why weren't they recommended 50 years ago?

EDIT: Or 19 years ago?
Actually, I first made the case for mid-caps back in 2000 in a discussion of slice-and-dice with Larry Swedroe on the old Morningstar Vanguard Diehards forum.

Since I was apparently the lone voice recommending mid-caps over the years, they became know as Mel's Unloved Mid-Caps.
Mel which fund(s) or ETF(s) do you prefer to use for allocating to mid caps?

Thanks

Dave
My personal answer to this question was VXF (etf) or VEXAX (admiral shares).
The index it seeks to track is the Dow Jones US total stock market completion index.
VOO is the Vanguard S&P 500 ETF. Obviously that is Large Cap.

The rest of the US market is the extended market, or the completion index, so named because it completes US total market.
Although VXF is basically "the rest of the market", it is market weighted heavily in favor of midcaps. Vanguard classifies it as Midcap Blend.
I don't have the exact figures but I following the morning star weighting, VXF is 75% midcaps by weight, and 25% small caps.

I was a little skittish on choosing my portfolio to be solely midcaps, wanting a little more diversification than that.
I was invested in VO for awhile, which honestly treated me very well for the duration of my investment.
Still, there's only 368 companies in this index, which made me question how diversified it was. VXF on the other hand has 3238 holdings.

If you want to tilt to midcaps specifically, VO is the vanguard midcap blend. It has done shockingly well in the past 10 years, returning 16.67% a year, but a more modest 9.47% a year since its inception in 2004
PersianRugs
Posts: 16
Joined: Thu Apr 11, 2019 1:46 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by PersianRugs »

Mel Lindauer wrote: Mon May 20, 2019 1:09 pm My personal answer to this question was VXF (etf) or VEXAX (admiral shares).
The index it seeks to track is the Dow Jones US total stock market completion index.
VOO is the Vanguard S&P 500 ETF. Obviously that is Large Cap.
What are your thoughts on S&P 400?

I have an index fund in my 401k that follows SP400, is that a good choice?
MotoTrojan
Posts: 11259
Joined: Wed Feb 01, 2017 7:39 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by MotoTrojan »

fennewaldaj wrote: Sun May 19, 2019 10:09 pm
TomCat96 wrote: Sun May 19, 2019 8:31 pm It's an oddity isn't it. Even looking at how few responses this thread gets, and how little dialogue there is indicates that Midcaps are indeed unloved.
I am a factor tilter with a dedicated mid cap allocation. I found the mid cap anomaly compelling in addition to the small cap so i have both small and mid cap blend and value. Basically I end up being ~1/3 large, mid, small with a value tilt at all capitalization levels. But I get why factor tilters ignore it as having 6 funds (LB, LV, MB, MV, SB, SV) instead of 2 (LB, SV) can seem excessive
Why bother with blend? Loss aversion?

This is why I only tilt small-value. Deepest exposure to both premiums and then the rest can be broad to keep me happy.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by JoMoney »

SovereignInvestor wrote: Mon May 20, 2019 5:11 pm In 1999 S&P was at 25 forward PE while mid caps were undetermined 20. That explains that out performance from 2000 to present.

The out performance in 1970s is interesting. It can't be explained by mid caps being riskier because mid caps best small caps.
There was a "bubble" of sky high priced large caps in the 1970's, one notable component of that was the trend toward the "Nifty Fifty"
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
SovereignInvestor
Posts: 630
Joined: Mon Aug 20, 2018 4:41 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by SovereignInvestor »

JoMoney wrote: Mon May 20, 2019 7:16 pm
SovereignInvestor wrote: Mon May 20, 2019 5:11 pm In 1999 S&P was at 25 forward PE while mid caps were undetermined 20. That explains that out performance from 2000 to present.

The out performance in 1970s is interesting. It can't be explained by mid caps being riskier because mid caps best small caps.
There was a "bubble" of sky high priced large caps in the 1970's, one notable component of that was the trend toward the "Nifty Fifty"
Good point. That would explain why large caps did poorer compared to smaller caps plus large caps being less risky. But doesn't seem to explain small caps.

50 years is a long time.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by JoMoney »

SovereignInvestor wrote: Mon May 20, 2019 10:42 pm
JoMoney wrote: Mon May 20, 2019 7:16 pm
SovereignInvestor wrote: Mon May 20, 2019 5:11 pm In 1999 S&P was at 25 forward PE while mid caps were undetermined 20. That explains that out performance from 2000 to present.

The out performance in 1970s is interesting. It can't be explained by mid caps being riskier because mid caps best small caps.
There was a "bubble" of sky high priced large caps in the 1970's, one notable component of that was the trend toward the "Nifty Fifty"
Good point. That would explain why large caps did poorer compared to smaller caps plus large caps being less risky. But doesn't seem to explain small caps.

50 years is a long time.
Maybe the relationship between "risk" and "risk premiums" is not as sufficient as some expect... or at least not persistent across time.
In bonds, you can find a similar situation where the top quality bonds have lower yields, and lower returns as financial theory might explain, and as the grades go down, yields and returns go up... but at some point down into junk grades the returns fall apart despite higher yields.

Maybe it's just too much volatility risk, over some time periods with positive returns on stocks if it was amplified with leverage it turns into negative returns. [e.g. PV Link showing varying amounts of leverage on S&P fund]
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
alex123711
Posts: 429
Joined: Sun May 20, 2018 5:01 am

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by alex123711 »

This is the first time I've seen the view that mid aps outperform, is there a link to the original thread? Curious about this, but isn't it similar to stock picking instead of just holding whole market? Also if mid caps perform well don't they just become large caps and drop out of the index? And also since they have done so well in the past 20 years would that mean the future returns are expected to be lower/ revert to the mean and small/ large cap may outperform next?
TomCat96
Posts: 1040
Joined: Sun Oct 18, 2015 12:18 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by TomCat96 »

JoMoney wrote: Mon May 20, 2019 11:37 pm
SovereignInvestor wrote: Mon May 20, 2019 10:42 pm
JoMoney wrote: Mon May 20, 2019 7:16 pm
SovereignInvestor wrote: Mon May 20, 2019 5:11 pm In 1999 S&P was at 25 forward PE while mid caps were undetermined 20. That explains that out performance from 2000 to present.

The out performance in 1970s is interesting. It can't be explained by mid caps being riskier because mid caps best small caps.
There was a "bubble" of sky high priced large caps in the 1970's, one notable component of that was the trend toward the "Nifty Fifty"
Good point. That would explain why large caps did poorer compared to smaller caps plus large caps being less risky. But doesn't seem to explain small caps.

50 years is a long time.
Maybe the relationship between "risk" and "risk premiums" is not as sufficient as some expect... or at least not persistent across time.
In bonds, you can find a similar situation where the top quality bonds have lower yields, and lower returns as financial theory might explain, and as the grades go down, yields and returns go up... but at some point down into junk grades the returns fall apart despite higher yields.

Maybe it's just too much volatility risk, over some time periods with positive returns on stocks if it was amplified with leverage it turns into negative returns. [e.g. PV Link showing varying amounts of leverage on S&P fund]
This doesn't surprise me at all. I don't think there's been too particular a study on it yet, but I wouldn't be surprised if subsequent financial research points it out. When I did my backtesting, and evidently when the OP did as well, he found that Midcaps outperformed small caps. Why?

Small Caps are clearly more volatile than Midcaps. Where is the risk premium? And as your wrote, the relationship between yield and risk breaks down for sufficiently large risk.

I think the actual reason for this is the limitation of the efficiency of markets. The market's "knowledge" is really the aggregate of human analysis and information in pricing such assets. For sufficiently chaotic assets, i.e. investing in Venezuela at the moment, the actual wisdom of the market itself can be challenged. It's not that any individual knows better, its that the collective market itself just isn't that well informed when risks are sufficiently advanced and the asset sufficiently chaotic. No amount of insight resolves true chaos.

It's why certain assets should be avoided altogether. This website esteems the knowledge of the market for good reason. But I think they fail to realize that the market's insight simply does not guarantee you sufficient compensation for the risk you are undertaking.

The midcap phenomena was the extent to which I found one could reasonably be compensated for taking on additional risk in the market. You do in fact get compensated for the additional volailtiy in midcaps. That relationship starts to break down in small caps. I say starts to, because the OP's chart shows quite clearly that you're definitely getting some additional benefit for taking on the additional risk in small caps.

Petulant mentioned he considered the midcap phenomena as part of the same thing with Midcap-Small Cap. I am inclined to agree. The data shows that there is in fact a point on the parabola where additional compensation for additional risk undertaken does in fact occur. From the data I would guess it's somewhere in the lower end of the midcap territory.
jbranx
Posts: 1544
Joined: Thu Feb 09, 2017 5:57 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by jbranx »

Recalling history off the top of my head, but pretty sure there was no "midcap" name in any fund with the exception of one at American National Bank when S&P launched the Midcap 400 in the middle of '91. The median market cap was about $700 million. The launch of the 400 was such a big deal that the WSJ ran the entire list of the companies in the index along with a big story. Only a few years later, most fund companies had an active midcap fund, which may explain some of the additional alpha of the fund and ETF.

I don't recall how many "completion"indexes or funds there were prior to '91, but those would be the ones to check for actual performance. Running a database search without the "inclusion" factor screens an index provider would impose--size, sectors, liquidity etc.--would seem to be mostly hypothetical. That's kind of like claiming the S&P 500 has "returned" 10-11% since 1926. It wasn't 500 stocks until 1957, no one owned it in '26 or '57, so not far from a fantasy claim. Further, the index paid no horrendous spread, commission, and high taxes to whittle down that fantastic return.

Another explanation could be--haven't researched this--but the largest source of new entrants for the S&P 500 come from the 400; the announcement index effect, therefore, benefits the 400 and not the 500.

There was skepticism that a midcap ETF would be very appealing, so State Street, which had sponsored SPY, bowed out and the launch by the American Stock Exchange was done at the Bank of NY. MDY is now back in the fold at SPDR's State Street.

Mel's "unloved midcaps" became a pretty well known phrase, partly because there were prominent gurus who insisted that midcaps made no sense in portfolios; better to just do large and small, they claimed. Same crowd that said best to ignore the S&P Smallcap 600 since the 2000 stocks in the Russell index clearly provided better diversification. I'll have to do a little research and see if there are recants. I think Dreyfus was the only fund company to license the Midcap 400 out the gate as a mutual fund; dont' know if it is still in existence. Along with Mel, I've been a midcap (MDY) fan, though my recollection of the history may be well off. Someone will be along to correct me.
Culbretd
Posts: 127
Joined: Sat Mar 24, 2018 4:06 am

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by Culbretd »

alex123711 wrote: Tue May 21, 2019 12:09 am This is the first time I've seen the view that mid aps outperform, is there a link to the original thread? Curious about this, but isn't it similar to stock picking instead of just holding whole market? Also if mid caps perform well don't they just become large caps and drop out of the index? And also since they have done so well in the past 20 years would that mean the future returns are expected to be lower/ revert to the mean and small/ large cap may outperform next?
Not necessarily... companies like Domino's pizza will prolly always be mid caps. Few companies do what Amazon and Facebook and Google did and just keep growing. The s&p 500 is built in sectors so the committee only choices so many technology companies to let in and only a few transportation companies to let it and so on and so forth. So this keeps a lot of good/bigger companies in the s&p 400 sector despite their market cap.
SovereignInvestor
Posts: 630
Joined: Mon Aug 20, 2018 4:41 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by SovereignInvestor »

As other comments eluded to, it also may be due to lack of funds plowing into midcaps.

In my 401K and many others I've seen, there's the large cap S&p option and a small cap option but no mid cap option.

Also the market can possibly have just gotten the risk premium wrong. It's less likely over 50 years but possible.

Also the S&P is so large that when a mid cap grows and is going to enter S&P it gets bid up so much by large mass of money that must buy it to index, and no such offsetting negative exists for Midcap because if stock drops out of midcap...it usually still will have to be bought by small cap index and those often have even more funds.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by JoMoney »

TomCat96 wrote: Tue May 21, 2019 12:09 am...
I think the actual reason for this is the limitation of the efficiency of markets. The market's "knowledge" is really the aggregate of human analysis and information in pricing such assets. For sufficiently chaotic assets, i.e. investing in Venezuela at the moment, the actual wisdom of the market itself can be challenged. It's not that any individual knows better, its that the collective market itself just isn't that well informed when risks are sufficiently advanced and the asset sufficiently chaotic. No amount of insight resolves true chaos.

It's why certain assets should be avoided altogether. This website esteems the knowledge of the market for good reason. But I think they fail to realize that the market's insight simply does not guarantee you sufficient compensation for the risk you are undertaking...
I would say the primary thrust on this board is towards taking the level of risk of "the market" and not pushing beyond that reaching for extra yield. Whether the market is efficient or not, the strategy of owning the entire market has properties that give it a special place regardless of whatever sub-segment might back-test well over any particular period.
TomCat96 wrote: Tue May 21, 2019 12:09 am...
The midcap phenomena was the extent to which I found one could reasonably be compensated for taking on additional risk in the market. You do in fact get compensated for the additional volailtiy in midcaps. That relationship starts to break down in small caps. I say starts to, because the OP's chart shows quite clearly that you're definitely getting some additional benefit for taking on the additional risk in small caps.

Petulant mentioned he considered the midcap phenomena as part of the same thing with Midcap-Small Cap. I am inclined to agree. The data shows that there is in fact a point on the parabola where additional compensation for additional risk undertaken does in fact occur. From the data I would guess it's somewhere in the lower end of the midcap territory.
Since there is no set definition of "midcaps" it strikes me as silly to try to pin down where along the spectrum is better or worse.
The S&P 500 is a "mid cap" fund if/when it is equal-weighted.
The Russell Mid Cap index is the Russell 1000 with top 200 lopped off.
But as you said about being "at the lower end", there are High Yield bond advocates that show "fallen angels" as being the sweet spot, the bonds that are at the border of being downgraded/upgraded.
I've seen data from low-volatility advocates that suggest taking "market" beta level of volatility, but doing so by selecting assortments from lower grades without the low-risk stocks at top end, provides a better return than the same level of risk made up including the lower returning top-end stocks.

...The thing is, unless you believe the market is efficiently pricing "risk premiums" (which the mid-cap or low-volatility phenomenon flies in the face of) there's no reason to expect it to continue. People will bid up the price and future higher returning segments will move to other neglected mis-priced areas.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
garlandwhizzer
Posts: 3565
Joined: Fri Aug 06, 2010 3:42 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by garlandwhizzer »

It's hard to argue with 45 years of outperformance and better risk adjusted returns (higher Sharpe ratio) that MC has shown relative to both LC and SC. I believe this is due largely to investors overlooking them. Factor enthusiasts believe SC is preferable and load up on the size factor with SC. Many other investors and most professionals stick with LC because it is more liquid, easier to trade large volumes of cash without trade frictions, less volatile, and perceived as less risky. There is built in popularity for both LC and SC more so than MC. Hence Mel's unloved MCs. Mel, much to his benefit, apparently recognized this long ago and overweighted MC as the crowd went in other directions. MC outperformance may continue as long as they remain relatively unloved. When academics discover a MC factor and publish it, the game may be over.

Garland Whizzer
User avatar
patrick013
Posts: 3301
Joined: Mon Jul 13, 2015 7:49 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by patrick013 »

Looking at it in terms of operational efficiency rather than market efficiency.

LC's have the economies of scale and sheer size but also can evolve into large sections of below industry mean operations. Low revenue per square foot, unused capacity, closings of main profit centers, etc..

So midcaps can become excellent companies thru efficient operations, high capacity utilization, running 2 full shifts at most locations, and controlling regional market share.

A little inflation and no doubt some midcaps can return above mean results.
age in bonds, buy-and-hold, 10 year business cycle
User avatar
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by vineviz »

It might not be obvious how insignificant the so-called "outperformance" of mid caps has been (0.2% difference in CAGR is not nothing, but it's statistically indistinguishable from nothing).

One thing that struck me as interesting is that mid caps have accomplished this feat primarily by being mediocre: I plotted the number of years that each size class (large cap, mid cap, small cap) was the best performer since 1972.

Image

Despite rarely doing best, by avoiding being worst they ended up doing okay.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
fennewaldaj
Posts: 1097
Joined: Sun Oct 22, 2017 11:30 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by fennewaldaj »

vineviz wrote: Tue May 21, 2019 3:29 pm It might not be obvious how insignificant the so-called "outperformance" of mid caps has been (0.2% difference in CAGR is not nothing, but it's statistically indistinguishable from nothing).
Even if you assume that mid caps and small caps are essentially the same isn't it a bit of a challenge to the idea of small as a factor that varies in a linear fashion as you go down the market cap spectrum? Like is the data saying small is good but there is really no benefit in going smaller once you get past a certain point? Or should one assume there has been something good about the universe of mid caps that is not captured in factor models (as far as I know they don't score better on quality, profitability, investment, or momentum)
User avatar
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by vineviz »

fennewaldaj wrote: Wed May 22, 2019 12:48 am
vineviz wrote: Tue May 21, 2019 3:29 pm It might not be obvious how insignificant the so-called "outperformance" of mid caps has been (0.2% difference in CAGR is not nothing, but it's statistically indistinguishable from nothing).
Even if you assume that mid caps and small caps are essentially the same isn't it a bit of a challenge to the idea of small as a factor that varies in a linear fashion as you go down the market cap spectrum?
The fact that the difference in returns between mid and small caps is statistically insignificant is, I think, the most important thing to keep in mind. Whatever difference appears to be there is just noise, and not the basis for any investment rationale.

Another thing to keep in mind is that the OP's chart, while certainly a relevant way to compare the asset classes, isn't the only or even best way. CAGR is an appropriate way to measure the past performance of funds, but it is influenced by the sequence of returns. This influence should be compensated for when computing expected returns, a case in which the arithmetic mean is arguably more suited. And the average return of small caps in Portfolio Visualizer is actually higher than for mid caps since 1972, and the SWR for small caps is higher too.

Here's a chart showing the three asset classes (large cap is #1, mid cap is #2, and small cap is #3) with monthly withdrawals. It's a very different scenario, and I think illustrates the value in looking beyond CAGR to some of the other dimensions of portfolio performance.

Image
source

But to your point, the fact that these funds have performed similarly doesn't necessarily represent a challenge to the linearity of the size factor. This is in part because the small cap funds actually HAVE had higher average returns than mid cap funds, as I mentioned above, and also small cap funds don't ONLY differ from mid cap funds in their exposure to the size factor.

The differences aren't dramatic, and of course are somewhat dependendent on the factor model you use. Exposure to the size factor has been a big benefit to small cap funds since 2002 but exposure to BAB has been a huge detriment. Other factors (HML, MOM, RMW) have provided a modest benefit as well.

Which reminds me of another point, which I don't think is just a quibble: Portfolio Visualizer asset class returns switch from Fama-French portfolios at the beginning to Vanguard funds at the end, but the switchover date is not the same for the mid cap and small cap series. They start using NAESX for small caps in 1990 but don't start using VIMSX for mid caps until 1999. So in Portfolio Visualizer's asset class returns you've got almost a decade long period in which the small cap returns were subject to fund expenses and transaction costs while the mid cap returns were affected by none of that.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
ruhigste
Posts: 107
Joined: Sun Jan 20, 2019 7:13 am

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by ruhigste »

In today's free annual financial plan from Vanguard Personal Advisor Services, in a 50/50 Stock Bond Portfolio, the stock recommendation is 42 % large-cap, 18 % mid-/small cap and 40 % international. They're not ignoring mid-cap, at least, but they're also not specifying how much of the 18 % should be mid-cap.
User avatar
patrick013
Posts: 3301
Joined: Mon Jul 13, 2015 7:49 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by patrick013 »

Benosis wrote: Fri May 17, 2019 9:07 pm
So why when I always see recommendations, I see people saying either just go 100% large cap, or go 80-90 large cap and 10-20% small cap for the tilt. I almost never see people going mid caps, even when it has outperformed for 50 years. Usually people say tilt more towards small cap, but shouldn't you tilt more towards mid cap?
Russell mid-cap performs well but the last 5 years it looks like the larger caps are having their "turn". A good period to have large caps as well if needed for withdrawals.

Image
age in bonds, buy-and-hold, 10 year business cycle
staythecourse
Posts: 6993
Joined: Mon Jan 03, 2011 8:40 am

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by staythecourse »

Mel Lindauer wrote: Mon May 20, 2019 1:09 pm
pdavi21 wrote: Mon May 20, 2019 12:27 am The real question is why weren't they recommended 50 years ago?

EDIT: Or 19 years ago?
Actually, I first made the case for mid-caps back in 2000 in a discussion of slice-and-dice with Larry Swedroe on the old Morningstar Vanguard Diehards forum.

Since I was apparently the lone voice recommending mid-caps over the years, they became know as Mel's Unloved Mid-Caps.
No offense Mel, but without a reason the made sense it was just a lucky guess. There is no logical premium that would make sense ex ante to suggest mid caps would/ should outperform. I will give you credit though for making such a great guess though and sure wish I was around at that time to listen!

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
SovereignInvestor
Posts: 630
Joined: Mon Aug 20, 2018 4:41 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by SovereignInvestor »

In 2000, the S&p400 midcaps had a forward PE of around 17, while the S&P had a PE around 25.

Mid caps (and small caps too) were much better values in 2000.
alex123711
Posts: 429
Joined: Sun May 20, 2018 5:01 am

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by alex123711 »

Are mid caps still at much better valuations? And what is the best way to invest in midcaps?
SovereignInvestor
Posts: 630
Joined: Mon Aug 20, 2018 4:41 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by SovereignInvestor »

As of today S&p 500 is at 16.0 forward PE while S&P 400 is at 15.0 PE. A difference but not totally game changing..especially since mid caps are more economically sensitive.

I'm considering moving some taxable funds towards midcaps mostly because the lower dividend yield versus SPX makes them tax efficient.

For Midcap IJH may be best bet.
PersianRugs
Posts: 16
Joined: Thu Apr 11, 2019 1:46 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by PersianRugs »

SovereignInvestor wrote: Thu May 23, 2019 7:50 pm As of today S&p 500 is at 16.0 forward PE while S&P 400 is at 15.0 PE. A difference but not totally game changing..especially since mid caps are more economically sensitive.

I'm considering moving some taxable funds towards midcaps mostly because the lower dividend yield versus SPX makes them tax efficient.
Total market is 77/17/6. I’m considering going 60/30/10
User avatar
Taylor Larimore
Posts: 32842
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by Taylor Larimore »

Bogleheads:

The search for market-beating performance goes on forever--it seems so easy. Unfortunately, it usually results in disappointment.

My wife and I tried for years to "beat the market." When we finally moved to Vanguard in 1986 we bought 16 Vanguard funds which we thought would be more "diversified" and would "beat the market." It took awhile, but I eventually learned that we were wrong on both counts.

Fortunately, Pat and I exchanged our mish-mash of funds to a simple Three-Fund Portfolio of total market index funds. It has provided us with a comfortable, worry-free retirement for many years (I'm 99).

What Experts Say About Total Market Index Funds

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible."
"Simplicity is the master key to financial success." -- Jack Bogle
dcabler
Posts: 4543
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by dcabler »

SovereignInvestor wrote: Thu May 23, 2019 7:50 pm As of today S&p 500 is at 16.0 forward PE while S&P 400 is at 15.0 PE. A difference but not totally game changing..especially since mid caps are more economically sensitive.

I'm considering moving some taxable funds towards midcaps mostly because the lower dividend yield versus SPX makes them tax efficient.

For Midcap IJH may be best bet.
Been in IJH for a while now. Couldn't be happier. Will it outperform? Who knows for sure but I hope so. Will it lag so far behind the total market such that's it's a disaster? I highly doubt it.

Remember when they used to stay "there are many roads to Dublin"? Yeah that.

Cheers.
Phyneas
Posts: 336
Joined: Tue Apr 27, 2021 9:10 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by Phyneas »

dcabler wrote: Sat Mar 18, 2023 2:09 pm
SovereignInvestor wrote: Thu May 23, 2019 7:50 pm As of today S&p 500 is at 16.0 forward PE while S&P 400 is at 15.0 PE. A difference but not totally game changing..especially since mid caps are more economically sensitive.

I'm considering moving some taxable funds towards midcaps mostly because the lower dividend yield versus SPX makes them tax efficient.

For Midcap IJH may be best bet.
Been in IJH for a while now. Couldn't be happier. Will it outperform? Who knows for sure but I hope so. Will it lag so far behind the total market such that's it's a disaster? I highly doubt it.

Remember when they used to stay "there are many roads to Dublin"? Yeah that.

Cheers.
If only it had a reliable international companion ...
60% AVGE | 20 Year TIPS LMP | 5% Cash
02nz
Posts: 10510
Joined: Wed Feb 21, 2018 2:17 pm

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by 02nz »

Taylor Larimore wrote: Sat Mar 18, 2023 2:06 pm Bogleheads:

The search for market-beating performance goes on forever--it seems so easy. Unfortunately, it usually results in disappointment.
Yep, fresh evidence here.
dcabler
Posts: 4543
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by dcabler »

Phyneas wrote: Sat Mar 18, 2023 2:56 pm
dcabler wrote: Sat Mar 18, 2023 2:09 pm
SovereignInvestor wrote: Thu May 23, 2019 7:50 pm As of today S&p 500 is at 16.0 forward PE while S&P 400 is at 15.0 PE. A difference but not totally game changing..especially since mid caps are more economically sensitive.

I'm considering moving some taxable funds towards midcaps mostly because the lower dividend yield versus SPX makes them tax efficient.

For Midcap IJH may be best bet.
Been in IJH for a while now. Couldn't be happier. Will it outperform? Who knows for sure but I hope so. Will it lag so far behind the total market such that's it's a disaster? I highly doubt it.

Remember when they used to stay "there are many roads to Dublin"? Yeah that.

Cheers.
If only it had a reliable international companion ...
I pair IJH with ISCF on the international side at 80% IJH and 20% ISCF

Cheers.
strummer6969
Posts: 978
Joined: Tue Dec 15, 2020 10:59 am

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by strummer6969 »

alex123711 wrote: Thu May 23, 2019 7:40 pm Are mid caps still at much better valuations? And what is the best way to invest in midcaps?
Current valuations for large, mid, and small cap.

https://www.yardeni.com/pub/stockmktperatio.pdf

Edit: I found out that many of these P/E ratios for small cap do not include non-earning companies which may skew the results. I'm not sure what if that's the case here.
Last edited by strummer6969 on Tue Mar 21, 2023 9:05 pm, edited 1 time in total.
Kal1981
Posts: 111
Joined: Fri Jan 29, 2021 11:36 am
Location: Berkeley, CA

Re: Mid Caps have outperformed Large & Small for the past 50 years. Yet I see very little recommendation for them. Why?

Post by Kal1981 »

Taylor Larimore wrote: Sat Mar 18, 2023 2:06 pm Bogleheads:

The search for market-beating performance goes on forever--it seems so easy. Unfortunately, it usually results in disappointment.

My wife and I tried for years to "beat the market." When we finally moved to Vanguard in 1986 we bought 16 Vanguard funds which we thought would be more "diversified" and would "beat the market." It took awhile, but I eventually learned that we were wrong on both counts.

Fortunately, Pat and I exchanged our mish-mash of funds to a simple Three-Fund Portfolio of total market index funds. It has provided us with a comfortable, worry-free retirement for many years (I'm 99).

What Experts Say About Total Market Index Funds

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible."
Thanks again Taylor for sharing your thoughts!
Post Reply