Why mid-cap stocks belong in your portfolio

By Jane Edmondson

Mid-cap companies should be a key component of a well-diversified portfolio, in my opinion. While mid-cap stocks are positively correlated with small- and large-cap stocks, they still offer diversification benefits for a multi-asset portfolio.

Furthermore, mid-cap stocks as an asset class have demonstrated better historical returns than small- and large-cap equities.

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Investing in mid-cap stocks gives you exposure to mid-sized companies ranging in size between $1 and $10 billion in market capitalization.

Some of today's leading brand names such as from Alaska Airlines (ALK), Autozone (AZO), Domino's Pizza (DPZ), Hershey's (HSY) and Under Armour (UA) are all mid-cap companies.

 
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These middle-of-the-pack players often come with less risk than small caps and comparable risk to large caps.

 
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Mid-cap advantage

Mid-cap companies tend to receive less coverage by Wall Street analysts, giving investment savvy active managers the ability to add significant value. In my opinion, a quantitative approach is particularly effective as it can objectively identify opportunities among rising star small-cap names and fallen-out-favor large cap names.

Furthermore, I believe mid-cap names generally have more robust growth characteristics than their large-cap counterparts, with more seasoned management teams, better operating histories, and greater liquidity than small caps.

Including mid-cap exposure in an overall portfolio allocation is a proven diversifier for increasing returns while minimizing risk given its favorable risk-reward characteristics.

In my opinion, Covestor's EQM Capital Midcap Quant portfolio is one way provide active exposure to mid-cap stocks in your investment portfolio. The portfolio is about 5.1% net of fees versus 6.5% for the S&P Midcap 400 Index through September 15.

Relative to the benchmark, the portfolio is more concentrated than the S&P index, typically holding 20 to 25 names in the portfolio and thus providing more opportunity for generating alpha.

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