A new report from VanEck has highlighted that the share markets' forgotten middle child – ASX mid-caps – could be poised for growth.
Cameron McCormack, Senior Portfolio Manager at VanEck, said large caps like BHP Group (ASX: BHP) and Commonwealth Bank Of Australia (ASX: CBA) dominate headlines and exert the greatest influence on the returns of the whole Australian share market.
Small caps, meanwhile, often attract attention for their higher-risk, higher-reward potential. Many of these companies are in their growth phase, still finding their feet.
Mid-cap companies rarely command the same attention when investors are focused on a small group of market heavyweights. But with developed-market bond yields at their highest levels in more than two decades, earnings expectations for some large-cap companies are becoming harder to sustain, and with mid-caps continuing to trade at a discount to the ASX 50, investors now have reason to take a closer look.
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Why a broader market is emerging
According to the report, markets do not tend to stay this concentrated for long.
While mega-cap companies have dominated the ASX 200's returns in recent years, history suggests periods where only a small number of stocks are driving the market tend to be the exception rather than the rule.
VanEck suggests that shifts have often emerged during periods of higher interest rates and slower economic growth, when investors become more selective about where earnings growth is likely to come from.
In these environments, companies able to keep growing earnings even as conditions become more difficult tend to attract greater attention from investors focused on consistency rather than simply market size.
While sector performance has varied, periods of rising rates have often coincided with stronger returns from materials and strategies that spread investments more evenly across the market.
There are already signs that a shift may be emerging again. In the United States, a record share of S&P 500 companies has outperformed the index this year, reversing the unusually narrow leadership that defined much of the past two years.
What about in Australia?
VanEck reinforced that signs of that shift are already beginning to emerge in Australia.
While large caps have outperformed since February reporting season, smaller companies delivered some of the market's strongest earnings surprises and most positive analyst target revisions. That suggests investors and analysts alike are beginning to see more room for earnings growth and share price improvement.
Importantly, many companies outside the largest stocks are still trading at cheaper valuations than the S&P/ASX 50, even though their earnings outlook has improved.
This matters because markets that rely too heavily on a small group of large companies can become more vulnerable, especially amid rising inflation, higher bond yields and geopolitical uncertainty.
As a result, ASX mid-cap companies may become increasingly important. They often offer a balance of stability and growth potential, while giving investors broader exposure beyond just the market's biggest names.
How to target ASX mid-caps
For investors looking to target ASX mid-cap companies, one option to consider is the VanEck S&P/ASX MidCap ETF (ASX: MVE).
It offers exposure to 50 established ASX-listed mid-cap companies across sectors, including industrials, healthcare, technology, resources and consumer businesses.
According to VanEck, it provides investors with a diversified exposure to a segment of the market that has historically sat between the defensiveness of large caps and the growth potential of smaller companies.
