There can be plenty of discourse amongst investors around the risk and reward of small-cap and large-cap companies.
While blue-chip stocks can be perceived as safer, they also often lack the upside of riskier, high-potential small-caps.
However, data from VanEck shows that mid-cap companies might offer the best of both worlds.
The VanEck S&P/ASX MidCap ETF (ASX: MVE) is one option for investors looking for exposure to 50 mid-cap companies.
The fund is made up of essentially the 50 Australian stocks that are ranked 51-100 by market cap (so after the largest 50).
It has outpaced the S&P/ASX 200 Index (ASX: XJO) in the last 5 years.
Here are three reasons it could continue.
Mid-caps outperform when the economy expands
Mid-caps are more sensitive to changes in the economy than large-caps.
When sentiment is positive and equities are rallying, mid-caps can outperform due to the exposure to industries like industrials and information technology.
These sectors tend to do well when the economy is expanding.
Favourable outlook
Data from the ASX ETF provider shows mid-caps recorded the highest net earnings beats among all market segments, reinforcing their fundamental strength.
What does this mean?
Essentially, mid-sized Australian companies have beaten profit expectations more often than small or large companies, suggesting these mid-cap firms are financially strong and performing well fundamentally.
These companies received higher target price revisions from sell-side analysts for the next 12 months, compared to the broader S&P/ASX 200 Index. This paints a favourable earnings and performance outlook for these companies.
Strong upside
Finally, at the time of writing, mid-caps are currently trading at more reasonable levels relative to their long-term averages.
This means they are (overall) offering more attractive valuations than large-caps and the ASX 200.
Essentially, if the economic growth continues, these stocks can have greater upside than other ASX 200 companies.
What are the best mid-cap stocks?
There are some clear examples of mid-cap companies outpacing the market so far this year.
- Lynas Rare Earths Ltd (ASX: LYC) is up more than 225% so far this year.
- Evolution Mining Ltd (ASX: EVN) has risen more than 135%.
- Charter Hall Group (ASX: CHC) has lifted approximately 55%.
The VanEck MVE fund has a unique portfolio focused on mid-cap companies.
There isn't another fund tracking the exact same index.
However, if investors are looking for similar funds, another to consider would be the BetaShares Australian Ex-20 Portfolio Diversifier ETF (ASX: EX20).
EX20 aims to track the performance of an index (before fees and expenses) comprising the 180 largest stocks listed on the ASX, after excluding the 20 largest, based on their market capitalisation.
