Middle Management: Increasing Mid-Cap Allocations

It is hard being stuck in the middle. Just look at mid-cap stocks. On a historical basis, mid-caps outperform their large- and small-cap counterparts. Yet many investors typically favor the perceived stability of large caps or the growth prospects offered by smaller companies.

Mid-caps aren’t as widely followed as the S&P 500 Index, and any mid-cap or mid-cap value premium isn’t widely discussed. Still, mid-caps provided superior long-term, risk-adjusted returns, a trait WisdomTree believes is durable.

No Performance Anxiety for Mid-Caps

Alluvial Fund August 2020 Performance Update

Alluvial FundAlluvial Fund performance update for the month ended August 31, 2020. Q2 2020 hedge fund letters, conferences and more Dear Partners and Colleagues, Alluvial Fund, LP returned 4.8% in August, compared to 7.2% for the S&P 500 and 5.6% for the Russell 2000. Year-to-date, Alluvial has returned 6.6% versus 9.7% for the S&P 500 and Read More


Investors thinking about a potential under-allocation to any asset class usually “follow the performance.” With mid-caps, it’s instructive to analyze rolling periods.1

Rolling Three-Year Periods: Based on available data since July 31, 1991, the S&P MidCap 400 Index beat both the S&P 500 and Russell 2000 indexes almost 50% of the time.

Rolling Five-Year Periods: The S&P MidCap 400 Index beat both the S&P 500 and Russell 2000 indexes almost 70% of the time.

Rolling 10-, 15- and 20-Year Periods: The S&P MidCap 400 Index beat the other two indexes in 100% of rolling periods of these three distinct lengths.

Rolling Periods: The Longer the Horizon, the Stronger the Mid-Cap Stocks
Middle Management: Increasing Mid-Cap Allocations

Mid-Cap Risk Isn’t Excessive

Our analysis of rolling periods clearly shows the long-term strength of mid-caps but this doesn’t account for risk. It is the perception of elevated risk that shifts investors’ focus away from mid-caps. Rolling period Sharpe ratios of mid-caps had superior risk-adjusted returns.2

Rolling Three-Year Periods: We saw that the S&P MidCap 400 beat both the S&P 500 and Russell 2000 indexes in almost 50% of these periods. Shifting from absolute returns to the Sharpe ratio, we see that the S&P 500 and S&P MidCap 400 led during almost the same amount of these periods. The S&P 500 typically had a lower risk, whereas the S&P MidCap 400 typically had higher returns.

Rolling Five-Year Periods: Interestingly, on an absolute return basis, the S&P MidCap 400 outperformed both the S&P 500 and Russell 2000 indexes about two-thirds of the time. Shifting to the Sharpe ratio yielded the same result, but the biggest change was that the higher risk of the Russell 2000 led to the S&P 500 leading in a greater number of rolling periods.

Rolling 10-, 15- and 20-Year Periods: Similar to the absolute returns analysis, on a Sharpe ratio basis the S&P MidCap 400 Index dominates both the S&P 500 and Russell 2000 indexes.

Rolling Periods: Mid-Caps Also Did Well at Risk-Adjusted Returns

Risk/Return Says Mid-Caps Warrant Consideration

Empirical long-term data proves that mid-caps are strong performers, calling into question the disproportionate amount of attention afforded to large and small caps while mid-caps quietly outperformed on both a risk-adjusted and absolute basis.

1Sources: WisdomTree, Bloomberg, with data from 7/31/1991 to 3/31/2016.
2Sources: WisdomTree, Bloomberg, Kenneth French Data Library (for risk-free rate) from 7/31/1991 to 3/31/2016.