State Street Investment Management has recently revised its forecast for global equities. Over the next five years, they anticipate a 39% return for the S&P 500. For the S&P Midcap 400, returns are projected at 41%, while the S&P Small Cap 600 might see around 42%.
Investors interested in these indexes can consider shares of the Vanguard S&P Midcap 400 ETF and the Vanguard S&P Small Cap 600 ETF. Here’s what you should know.
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The Vanguard S&P MidCap 400 ETF aims to reflect the performance of 400 mid-cap stocks, which typically include companies valued between $8 billion and $22.7 billion. This fund encompasses both value and growth stocks across various sectors, focusing primarily on industrials (24%), finance (15%), and technology (14%).
The top five holdings are:
- Siena: 1%
- Makes sense: 0.9%
- Lumen: 0.8%
- Curtis Wright: 0.7%
- Flex: 0.7%
Over the past 15 years, the Vanguard S&P MidCap 400 ETF has delivered a total return of 365%, averaging 10.8% annually, while the S&P 500 has outperformed significantly with a 591% return (13.7% annually). One factor behind the mid-cap funds’ less impressive results could be their limited exposure to the thriving technology sector.
This ETF carries an expense ratio of 0.07%, meaning shareholders would pay $7 annually for every $10,000 invested. While this index fund is a solid choice for those seeking mid-cap exposure, I’m somewhat skeptical it will outperform the S&P 500 in the coming years—I’ll delve into that later.
The Vanguard S&P Small Cap 600 ETF mirrors the performance of 600 small-cap stocks, defined as companies with market values ranging from $1.2 billion to $8 billion. Similar to its mid-cap counterpart, this fund includes a mix of value and growth stocks, but it leans towards financials (18%), industrials (18%), and consumer discretionary (13%).
The top five holdings are:
- Solstice Advanced Material: 0.6%
- Arrowhead Pharmaceuticals: 0.6%
- Mog: 0.5%
- LKQ: 0.5%
- Interdigital: 0.5%
In the past 15 years, the Vanguard S&P Small Cap 600 ETF has posted a 360% return (10.7% annually), falling short of the S&P 500 by 231 points. However, the Russell 2000 benchmark for small caps has seen a notable rise of 60 percentage points, likely due to stricter eligibility criteria.
Similar to the MidCap ETF, the Vanguard S&P Small Cap 600 ETF also has a 0.07% expense ratio. While this fund suits investors looking to tap into the small-cap space, I suspect it will not outpace the S&P 500 either—perhaps it might even exceed the Russell 2000 over the next five years.
It’s essential to acknowledge the fundamental drawbacks of index funds that focus on small- and mid-cap stocks. Often, high-performing stocks get removed from the fund once they surpass a certain market valuation, while underperformers linger.
This can create a scenario where the funds sell off their winners and retain the losers—a rather questionable strategy. As Peter Lynch aptly noted, “Selling the winners and keeping the losers is like cutting a flower or watering a weed.”
In contrast, the S&P 500 comprises stocks that have not only made it past the mid-cap and small-cap stages but are also regularly rebalanced to represent the most significant players in the market. That’s why I personally prefer an S&P 500 index fund over one targeting small or mid-cap stocks.
Before considering an investment in the Vanguard S&P MidCap 400 ETF, it’s worth noting this: Analysts from the Motley Fool have pinpointed some stocks they believe could offer significant returns in the near future, and this ETF did not make their list of top 10 picks.
For instance, look at Netflix. If you had invested $1,000 back in December 2004, your investment could now be worth around $519,015! Or, take Nvidia, which, if you invested $1,000 back in April 2005, might now be valued at about $1,086,211!
It’s noteworthy that the average return from stock advisor services is 941%, compared to the S&P 500’s 194%, signaling a significant outperformance.
Though, I’d certainly recommend checking out stock advisory services if you’re interested in maximizing returns and joining a community of retail investors.
