More potential for growth.
Mid-cap stocks experience more volatility, frightening away some investors, but add diversity. These stocks have a market capitalization between $2 billion and $10 billion and a reputation for more growth potential than many large-cap stocks, says Rich Messina, senior vice president for investment product management at E-Trade Financial. Mid-cap stocks are considered less risky than small-cap stocks, which react more intensely to market volatility. Mid-cap growth stocks typically do not often produce a dividend and instead rely on capital gains, Messina says. The easiest way to invest in the mid-cap growth market is through a mutual fund or an exchange-traded fund. Here are seven mid-cap growth funds to consider.
Vanguard Mid-Cap Growth ETF (ticker: VOT)
Advanced Micro Devices (AMD), Dollar Tree (DLTR) and Realty Income Corp. (O) are examples of undervalued, yet growing mid-cap companies inside this Vanguard ETF, says Todd Rosenbluth, head of ETF and mutual fund research at New York-based CFRA research. Mid-cap stocks remain under the radar for many investors despite a strong combination of growth and "stability traits that should garner significant interest," he says. The expense ratio is low at 0.07%. The ETF's five-year return is 9.9% while the 10-year return is 13.4%. "With mid-cap funds, investors get the benefits of diversification across sectors and individual securities to limit the risk more common with individual mid-cap securities," he says.
Buffalo Discovery Fund (BUFTX)
The Buffalo Discovery Fund is benchmarked to the Morningstar U.S. Mid-Growth Index and seeks long-term capital appreciation by investing in mid caps judged to have the potential for above-average earnings growth. The expense ratio is higher at 1.02% since the fund is actively managed by managers Clay Brethour and Dave Carlsen. The ETF's five-year return is 9.9% while the 10-year return is 13.4%. "The key difference is a mutual fund aims to beat a certain benchmark through active management at a slightly higher cost than an ETF, which is passively managed and mirrors an index," Messina says.
iShares S&P Mid-Cap 400 Growth ETF (IJK)
The iShares S&P Mid-Cap 400 Growth ETF tracks the S&P MidCap 400 Index, which includes stocks that tend to be less speculative. The ETF has 245 holdings currently. The expense ratio is 0.24% and the ETF's five-year return is 9.3% while the 10-year return is 12.8%. The expense ratio of ETFs, or the fees charged to operate them, are usually lower than actively managed mutual funds that have two or more managers choosing stocks to sell and buy over a certain period.
Vanguard Mid Cap Growth (VMGRX)
This growth fund is actively managed by several portfolio managers and is benchmarked to the Russell Midcap Growth Index. The expense ratio is 0.36%, with a five-year return of 10.8% and a 10-year return of 14.2%. The fund remains an "appealing" low-cost option for investors despite subadvisor shuffling, Morningstar analyst Linda Abu Mushrefova says in a report. In December 2018, Vanguard replaced longtime subadvisor William Blair with two new subadvisors, Frontier Capital Management, responsible for 45% of assets, and Wellington Management, now overseeing 5%. RS Investments has been managing the fund since December 2016 and continues to run 50% of the portfolio.
JPMorgan U.S. Momentum Factor ETF (JMOM)
The JMOM ETF targets U.S. mid-caps with strong risk-adjusted stocks and tracks the JP Morgan US Momentum Factor Index that matches the Russell 1000 sector weights. The expense ratio is 0.12% and the ETF's one-year return is 15.1%. Investors should be prepared to see their portfolio's balance move more when investing in mid-size companies because of the greater volatility, says Daren Blonski, managing principal of Sonoma Wealth Advisors. "Over the long term, mid-cap companies can provide healthy returns," he says. "Investing in mid-cap companies generally requires a significant research process. Using an active manager to invest one's portfolio in mid-size companies can be a good strategy."
iShares Morningstar Mid-Cap Growth ETF (JKH)
This iShares ETF tracks the Morningstar Mid Growth Index, a benchmark index that includes mid-caps that should grow at a faster pace compared to the rest of the stock market based on forward and historical earnings, book value, cash flow and revenue. The expense ratio is 0.3% and the ETF's five-year return is 10.9% while the 10-year return is 13.7%. ETFs often have expense ratios of less than 0.5% when they passively track an index or basket of assets and are good low-cost options for people who want to invest in a specific sector.
SPDR S&P 400 Mid Cap Growth ETF (MDYG)
The SPDR S&P 400 Mid Cap Growth ETF also tracks the S&P MidCap 400 Growth Index, which includes stocks that demonstrate the ability to grow based on sales growth, earnings change to price and momentum. The ETF owns 245 stocks. The expense ratio is 0.15% and the fund's five-year return is 9.1% while the 10-year return is 13.2%. ETFs are baskets of stocks, but their share price fluctuates throughout the trading day, unlike mutual funds whose price is not determined until after the market closes. You can also start investing in an ETF by purchasing only one share while mutual funds often require a minimum of $3,000.
Mid-cap growth funds to buy:
-- Vanguard Mid-Cap Growth ETF (VOT)
-- Buffalo Discovery Fund (BUFTX)
-- iShares S&P Mid-Cap 400 Growth ETF (IJK)
-- Vanguard Mid Cap Growth (VMGRX)
-- JPMorgan U.S. Momentum Factor ETF (JMOM)
-- iShares Morningstar Mid-Cap Growth ETF (JKH)
-- SPDR S&P 400 Mid Cap Growth ETF (MDYG)