Mid-cap stocks are often overlooked, but some market observers believe the asset class will outperform large-cap names next year. Investors can play that trend with quality growth via the Barron’s 400 ETF (NYSEArca: BFOR).
BFOR tracks the Barron’s 400 Index (B400), which takes 400 stocks from the broader MarketGrader U.S. Coverage Universe by using a methodology that selects components based on the strength of their fundamentals in growth, valuation, profitability, and cash flow, and then screens components for certain criteria regarding concentration, market capitalization, and liquidity.
BFOR is classified as a mid-cap growth fund, a factor combination that’s historically potent, but one that also comes with elevated valuations. BFOR looks to access that growth before it becomes too pricey.
“Mid-cap stocks could benefit from better earnings when the economy recovers, says Jodie Gunzberg, managing director, chief institutional investment strategist at Morgan Stanley Wealth Management,” reports Ellen Chang for U.S. News and World Report.
Banking on BFOR in 2021
Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow, along with providing more stable stock prices. Additionally, they are not so big that their size would slow down growth.
The mid-cap category has also outperformed their larger peers, but with lower volatility than small caps. Moreover, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.
BFOR data by YCharts
Growth stocks are often associated with high-quality, prosperous companies whose earnings are expected to continue increasing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. Still, data suggest the growth/value premium isn’t overly elevated relative to historical norms.
With the U.S. economy shaking off the effects of the coronavirus recession, BFOR and mid-caps are all the more relevant heading into 2021.
“The S&P MidCap 400 Index on average has outperformed in the 12 months following the troughs of large caps during past recessions – midcaps returned 51.3% compared to large caps returning 29.4%. The strong mid-cap outperformance holds for 24-month periods with large caps returning 48.2% compared to 80.3% for midcaps, Gunzberg says,” according to U.S. News.
Alternatives to BFOR in the mid-cap growth space include the iShares Russell Midcap Growth ETF (NYSEARCA: IWP), First Trust Mid Cap Growth AlphaDEX Fund (NasdaqGM: FNY) and the iShares Morningstar Mid Growth ETF(NYSEArca: JKH).
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