Anyone who has been in the stock market for long enough has likely heard the merits of index fund investing. They’re simple to own and often produce better returns than picking individual stocks. And in most cases, an index fund like the Vanguard S&P 500 ETF or the SPDR S&P 500 ETF Trust — built to mirror the S&P 500 — is the go-to recommendation.
That’s not your only option though. In fact, it’s arguably not even your best option. Your portfolio may be far better served with a stake in the Vanguard Mid-Cap ETF (NYSEMKT: VO). Here’s why.
Just as the name suggests, Vanguard’s Mid-Cap ETF holds a bunch of mid-cap stocks — companies typically with market capitalizations of between $2 billion and $10 billion. While this particular fund is meant to reflect the performance of the 290 constituents of the cap-weighted CRSP US Mid Cap index, you’ll likely see a similar performance from the S&P 400 MidCap index and any of the exchange-traded funds that mirror it.
More important to buy-and-hold investors, however, you should make a point of holding a position in this ETF. It’s got a long track record of outperforming the S&P 500, after all. True, the S&P 500 has performed uncharacteristically well since 2020 thanks to small number of the world’s already-biggest technology stocks becoming dramatically bigger by leading the artificial intelligence revolution.
Yet, going all the way back to its creation back in 1991 the S&P 400 MidCap index has easily outpaced its large cap counterpart.
This superior performance actually makes sense. Mid-sized companies are in the sweet spot of their existence. They’re past their wobbly start-up years, but haven’t yet reached their full growth stride that can only be achieved with scale. In most cases, their best growth lies ahead, often leveraged by being in the right place at the right time with the right product or service.
Artificial intelligence robotics outfit UiPath recently grew its way into the S&P 400, for instance, while Robinhood Markets and Carvana both recently outgrew the S&P 400 to become members of the S&P 500. In all three cases, their respective marketplaces were ready for something new.
