This article contains details specific to United States (US) investors. Acting on fund or ETF suggestions in it may have harmful US tax consequences for non-US investors.
A mid cap, a short form of middle capitalization, has a market capitalization in the middle of large caps and small caps. Although there is no standardized definition, it is generally accepted that mid caps are companies having a market capitalization of between two and ten billion dollars.
Stocks may be classified by the size of the corporation. This is most commonly done looking at the market capitalization. Market Capitalization is simply a measurement found by taking a stock's current share price and multiplying it by the number of stock shares outstanding. Exact market cap ranges will vary among different financial and rating institutions, [note 1] but there are three different terms commonly used to describe stocks by their general size: Large Cap stocks; Mid Cap stocks; and Small Cap stocks. Market cap terms are relative and are constantly changing as companies get bigger and smaller.
Table 1. Market Capitalization
Size Characterization
Capitalization Range
Large Capitalization Stocks
over $10 billion dollars
Mid Capitalization Stocks
between $2 billion and $10 billion dollars
Small Capitalization Stocks
between $300 million and $2 billion dollars
In terms of the market size ranges spanned by mid-cap indexes, most mid cap stocks comprise the range below the 70% of the market capitalization occupied by large-caps and above the bottom 10% occupied by small-cap stocks. The percentile ranges of market capitalization from index providers is included in the following table:
Since 1975, investors have been able to index US large-cap stocks. Since the early 1990's investors have been able to index US total market and US mid-cap stocks. Vanguard mid-cap value and mid-cap growth index funds were introduced in 2006.
The returns of Vanguard funds are provided in the following three tables. For comparison, both large-cap and small-cap fund returns are included. Table 5 shows returns in the 1990's, a period dominated by the returns of large-cap growth stocks; Table 6 shows returns in the 2000's, when mid-cap, small-cap and value stocks provided premium returns; Table 7 provides returns over the entire period. Vanguard indexed the large-growth, large-value, and mid-cap indexes from inception to May 2003 in S&P style indexes. From May 2003 through January 30, 2013 all of the style funds were indexed to MSCI indexes. Since January 30, 2013, the funds have been benchmarked to CRSP indexes.
In addition to Vanguard,[9]Fidelity and T.Rowe Price[10] offer extended market index funds, and Dreyfus[11] offers a mid-cap index fund.
According to IndexUniverse.com, a total of 24 non sector mid cap ETFs are currently available. The major ETF managers are included in the table below. One should note that Powershares ETFs are indexed to proprietary quasi-active indexes (the Intellidex series).
↑Actively managed mid cap funds are not very tax efficient. Active funds tend to distribute hefty capital gains distributions. While the Vanguard Extended Market and Vanguard Mid-Cap Index funds distributed capital gains during the long bull market of the eighties and nineties, they are currently very tax efficient as a result of the following three factors:
The benchmarking of the funds to CRSP indexes which utilize transition bands between size and valuation metrics. These bands tend to reduce the turnover of stocks as they migrate across indexes, which helps reduce taxable gain realization.
The accumulation of realized loss carryforwards from the 2000-2002 and 2008 bear markets. These carryforwards can be applied to offset future realized gains in the funds through fiscal year 2017. Active mid cap funds tend to realize gains at a much quicker rate than do index funds. This tendency results in active funds depleting loss carryforwards much faster than index funds.
The ETF share classes of Vanguard index funds, through the institutional creation and redemption process of ETF shares, serve to enhance the funds' tax efficiency by gradually removing low basis stock from the fund portfolios and by stabilizing the funds' level of loss carryforwards.
Please refer to the following wiki pages for Vanguard mid cap index fund tax distribution histories and tax attributes:
Under current law, qualified dividends are taxed at lower capital gains tax rates. The qualified dividends a mid cap index fund passes on to shareholders is reduced by the holding periods of a fund's purchases and sales of stocks and by the extent of a fund's holding of REITS, whose dividends are unqualified.
Mid-cap value index funds provide higher dividend payouts than do mid-growth or mid-blend indexes. Since the 2004 advent of ETF share classes in the index funds, none have distributed a capital gains distribution:
This article contains details specific to United States (US) investors. Acting on fund or ETF suggestions in it may have harmful US tax consequences for non-US investors.