Mid-Cap Stocks – A Sweet Spot for Investors
Mid-cap investing historically has offered an attractive opportunity for investors, combining the staying power of large-cap stocks with the growth potential of small-cap stocks. This becomes clear when looking at the long-term returns of mid-sized companies, dating back over 40 years. Since 1979 – through the end of 2022 – the Russell Midcap® lndex1 has outperformed the small-cap Russell 2000® lndex2 and the large-cap Russell 1000® Index.3
Room for Growth in Mid-Cap
Mid-cap companies tend to have faster earnings and sales growth rates than large-cap stocks, possibly resulting from relatively more remaining business opportunities in the mid-cap space. While many large-cap companies have already expanded internationally, and reached out to most of their potential buyers, mid-sized companies may have more untapped opportunities ahead of them.
Flexibility and Hidden Potential
Because of their size, mid-cap companies may be nimbler than large-caps at pivoting or adapting their business models. This agility may help them more quickly adjust their business approach to take advantage of new or shifting market opportunities.
lt is generally accepted that mid-cap companies receive less active coverage by stock analysts than large-caps. Thus, the most skilled active portfolio managers and their analysts may be able to uncover opportunities while most analysts focus on the largest companies in the world.
Mid-Caps and Their Goldilocks Factors
Generally speaking, mid-sized companies are usually more established than smaller companies, which can mean they present lower volatility risk to investors. This is clear when looking at the standard deviation over time of the Russell Midcap® Index and the Russell 2000® Index.
Similarly, mid-cap companies tend to have lower failure rates than small-caps. Many small-cap companies have narrow business lines, concentrated buyers, and a single region of focus. This scenario may mean a higher probability of a single event resulting in significant business challenges.
From the perspective of access to capital for growth and security, mid-cap companies may also have an advantage. Small companies can face significant challenges when trying to access capital, via either equity or debt financing. Securing financing is a costly and complicated process, and one that arguably favors larger companies. We have seen the challenges that small companies can have acquiring working capital – particularly in markets that are not completely risk-on with credit widely available.
Mid-Cap Stocks and the Business Life Cycle
The natural business cycle for successful companies – startup, growth, maturity – may further bolster the appeal of mid-cap stocks for investors. Smaller companies in the startup or growth phase can present growth opportunities, but meaningful risk. By contrast, mid-sized companies in the growth phase often have products or services that have proven successful over time, established distribution channels, and room to prosper. Moreover, more mature large companies may have fewer opportunities for organic growth and often begin seeking acquisitions as they work to maintain their legacy success.
Pulling It All Together
For investors, mid-cap stocks can represent an attractive blend of some of the best of large-cap and small-cap characteristics. Historical data shows that mid-caps have often had the best return per unit of risk relative to large- and small-cap companies. Nevertheless, over the short term, different capitalization groups usually rotate in and out of favor – such as in the late 2010s, when large-cap stocks demonstrated outstanding performance and exhibited more limited risk.
Investors interested in mid-cap companies have a range of options to consider, including the Natixis Vaughan Nelson Mid Cap ETF (VNMC). VNMC's sister mutual fund dates back several years, with its management team bringing years of experience to their investment approach. Utilizing a research-driven value strategy, the team looks for undervalued mid-cap companies and marketplace inefficiencies in the pursuit of strong risk-adjusted returns. While startups and veteran companies earn a lot of mindshare and media attention, investors may want to consider what portfolio opportunities exist in the mid-cap arena.
1 The Russell Midcap® Index measures the performance of the mid-cap segment of the US equity universe. The Russell Midcap® is a subset of the Russell 1000® Index. It includes approximately 1000 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap® Index represents approximately 31% of the total market capitalization of the Russell 1000® companies. The Russell Midcap® Index is constructed to provide a comprehensive and unbiased barometer for the mid-cap segment. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true mid-cap opportunity set.
2 The Russell 2000® Index is an unmanaged index that measures the performance of the small-cap segment of the US equity universe.
3 The Russell 1000® Index measures the performance of the large-cap segment of the US equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000® represents approximately 92% of the US market. The Russell 1000® Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are reflected.
The Sharpe ratio is calculated by using standard deviation and excess return to determine return per unit of risk.
ETF General Risk: Exchange-Traded Funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETF: Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Equity Securities Risk: Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Small and Mid-Cap Stocks Risk: Investments in small and midsize companies can be more volatile than those of larger companies. Value Investing Risk: Value investing carries the risk that a security can continue to be undervalued by the market for long periods of time. Predatory Trading Practices Risk: Although the Fund seeks to benefit from keeping its portfolio holdings information secret, market participants may attempt to use the Proxy Portfolio and related Proxy Portfolio Disclosures to identify the Fund's holdings and trading strategy. If successful, this could result in such market participants engaging in predatory trading practices that could harm the Fund and its shareholders. Proxy Portfolio Structure Risk: Unlike traditional ETFs that provide daily disclosure of their portfolio holdings, the Fund does not disclose the daily holdings of the Actual Portfolio. Instead, the Fund discloses a Proxy Portfolio that is designed to reflect the economic exposure and risk characteristics of the Fund's Actual Portfolio on any given trading day. Although the Proxy Portfolio and Proxy Portfolio Disclosures are intended to provide Authorized Participants and other market participants with enough information to allow them to engage in effective arbitrage transactions that will keep the market price of the Fund's shares trading at or close to the underlying NAV per share of the Fund, while at the same time enabling them to establish cost-effective hedging strategies to reduce risk, there is a risk that market prices will vary significantly from the underlying NAV of the Fund. Authorized Participant Concentration Risk: Only an authorized participant ("Authorized Participant") may engage in creation or redemption transactions directly with the Fund. The Fund has a limited number of institutions that act as Authorized Participants, none of which are or will be obligated to engage in creation or redemption transactions. To the extent that these institutions exit the business or are unable to proceed with creation and/or redemption orders with respect to the Fund and no other Authorized Participant is able to step forward to create or redeem Creation Units, Fund shares may trade at a discount to NAV and possibly face trading halts and/or delisting. The Fund's novel structure may affect the number of entities willing to act as Authorized Participants, and this risk may be exacerbated during times of market stress. Trading Issues Risk: Trading in Fund shares on the NYSE Arca may be halted in certain circumstances. If 10% or more of the Fund's Actual Portfolio does not have readily available market quotations, the Fund will promptly request that the NYSE Arca halt trading in the Fund's shares. Such trading halts may have a greater impact on the Fund compared to other ETFs due to its lack of transparency. Premium/Discount Risk: The market value of the Fund's shares will fluctuate, in some cases materially, in response to changes in the Fund's NAV, the intraday value of the Fund's holdings, and the relative supply and demand for the Fund's shares on the exchange. There is a risk (which may increase during periods of market disruption or volatility) that market prices for Fund shares will vary significantly from the Fund's NAV. This risk may be greater for the Fund than for traditional ETFs that disclose their full portfolio holdings on a daily basis because the publication of the Proxy Portfolio does not provide the same level of transparency as the publication of the full portfolio by a fully transparent active ETF. Fund is new with a limited operating history.
Before investing, carefully consider the Fund’s investment objectives, risks, charges, and expenses. Please visit im.natixis.com or call us at 800-225-5478 for a prospectus or a summary prospectus containing this and other information. Read it carefully before investing.
ALPS Distributors, Inc. is the distributor for the Natixis Vaughan Nelson Mid Cap ETF. Natixis Distribution, LLC is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, LLC.
Room for Growth in Mid-Cap
Mid-cap companies tend to have faster earnings and sales growth rates than large-cap stocks, possibly resulting from relatively more remaining business opportunities in the mid-cap space. While many large-cap companies have already expanded internationally, and reached out to most of their potential buyers, mid-sized companies may have more untapped opportunities ahead of them.
Flexibility and Hidden Potential
Because of their size, mid-cap companies may be nimbler than large-caps at pivoting or adapting their business models. This agility may help them more quickly adjust their business approach to take advantage of new or shifting market opportunities.
lt is generally accepted that mid-cap companies receive less active coverage by stock analysts than large-caps. Thus, the most skilled active portfolio managers and their analysts may be able to uncover opportunities while most analysts focus on the largest companies in the world.
Mid-Caps and Their Goldilocks Factors
Generally speaking, mid-sized companies are usually more established than smaller companies, which can mean they present lower volatility risk to investors. This is clear when looking at the standard deviation over time of the Russell Midcap® Index and the Russell 2000® Index.
Annualized Risk – Standard Deviation %
| 1-yr | 3-yr | 5-yr | 10-yr | |
|---|---|---|---|---|
| Russell Midcap® Index | 23.86 | 18.82 | 21.16 | 16.59 |
| Russell 2000® Index | 24.85 | 21.53 | 23.80 | 19.44 |
Source: Morningstar. As of 5/31/23.
Past performance is no guarantee of future results. Index returns are not intended to imply any future performance of any investment product.
You may not invest directly in an index. Standard deviation is a statistical measure that sheds light on historical volatility.
From the perspective of access to capital for growth and security, mid-cap companies may also have an advantage. Small companies can face significant challenges when trying to access capital, via either equity or debt financing. Securing financing is a costly and complicated process, and one that arguably favors larger companies. We have seen the challenges that small companies can have acquiring working capital – particularly in markets that are not completely risk-on with credit widely available.
Mid-Cap Stocks and the Business Life Cycle
The natural business cycle for successful companies – startup, growth, maturity – may further bolster the appeal of mid-cap stocks for investors. Smaller companies in the startup or growth phase can present growth opportunities, but meaningful risk. By contrast, mid-sized companies in the growth phase often have products or services that have proven successful over time, established distribution channels, and room to prosper. Moreover, more mature large companies may have fewer opportunities for organic growth and often begin seeking acquisitions as they work to maintain their legacy success.
Pulling It All Together
For investors, mid-cap stocks can represent an attractive blend of some of the best of large-cap and small-cap characteristics. Historical data shows that mid-caps have often had the best return per unit of risk relative to large- and small-cap companies. Nevertheless, over the short term, different capitalization groups usually rotate in and out of favor – such as in the late 2010s, when large-cap stocks demonstrated outstanding performance and exhibited more limited risk.
Investors interested in mid-cap companies have a range of options to consider, including the Natixis Vaughan Nelson Mid Cap ETF (VNMC). VNMC's sister mutual fund dates back several years, with its management team bringing years of experience to their investment approach. Utilizing a research-driven value strategy, the team looks for undervalued mid-cap companies and marketplace inefficiencies in the pursuit of strong risk-adjusted returns. While startups and veteran companies earn a lot of mindshare and media attention, investors may want to consider what portfolio opportunities exist in the mid-cap arena.
2 The Russell 2000® Index is an unmanaged index that measures the performance of the small-cap segment of the US equity universe.
3 The Russell 1000® Index measures the performance of the large-cap segment of the US equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000® represents approximately 92% of the US market. The Russell 1000® Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are reflected.
The Sharpe ratio is calculated by using standard deviation and excess return to determine return per unit of risk.
ETF General Risk: Exchange-Traded Funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETF: Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Equity Securities Risk: Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Small and Mid-Cap Stocks Risk: Investments in small and midsize companies can be more volatile than those of larger companies. Value Investing Risk: Value investing carries the risk that a security can continue to be undervalued by the market for long periods of time. Predatory Trading Practices Risk: Although the Fund seeks to benefit from keeping its portfolio holdings information secret, market participants may attempt to use the Proxy Portfolio and related Proxy Portfolio Disclosures to identify the Fund's holdings and trading strategy. If successful, this could result in such market participants engaging in predatory trading practices that could harm the Fund and its shareholders. Proxy Portfolio Structure Risk: Unlike traditional ETFs that provide daily disclosure of their portfolio holdings, the Fund does not disclose the daily holdings of the Actual Portfolio. Instead, the Fund discloses a Proxy Portfolio that is designed to reflect the economic exposure and risk characteristics of the Fund's Actual Portfolio on any given trading day. Although the Proxy Portfolio and Proxy Portfolio Disclosures are intended to provide Authorized Participants and other market participants with enough information to allow them to engage in effective arbitrage transactions that will keep the market price of the Fund's shares trading at or close to the underlying NAV per share of the Fund, while at the same time enabling them to establish cost-effective hedging strategies to reduce risk, there is a risk that market prices will vary significantly from the underlying NAV of the Fund. Authorized Participant Concentration Risk: Only an authorized participant ("Authorized Participant") may engage in creation or redemption transactions directly with the Fund. The Fund has a limited number of institutions that act as Authorized Participants, none of which are or will be obligated to engage in creation or redemption transactions. To the extent that these institutions exit the business or are unable to proceed with creation and/or redemption orders with respect to the Fund and no other Authorized Participant is able to step forward to create or redeem Creation Units, Fund shares may trade at a discount to NAV and possibly face trading halts and/or delisting. The Fund's novel structure may affect the number of entities willing to act as Authorized Participants, and this risk may be exacerbated during times of market stress. Trading Issues Risk: Trading in Fund shares on the NYSE Arca may be halted in certain circumstances. If 10% or more of the Fund's Actual Portfolio does not have readily available market quotations, the Fund will promptly request that the NYSE Arca halt trading in the Fund's shares. Such trading halts may have a greater impact on the Fund compared to other ETFs due to its lack of transparency. Premium/Discount Risk: The market value of the Fund's shares will fluctuate, in some cases materially, in response to changes in the Fund's NAV, the intraday value of the Fund's holdings, and the relative supply and demand for the Fund's shares on the exchange. There is a risk (which may increase during periods of market disruption or volatility) that market prices for Fund shares will vary significantly from the Fund's NAV. This risk may be greater for the Fund than for traditional ETFs that disclose their full portfolio holdings on a daily basis because the publication of the Proxy Portfolio does not provide the same level of transparency as the publication of the full portfolio by a fully transparent active ETF. Fund is new with a limited operating history.
Before investing, carefully consider the Fund’s investment objectives, risks, charges, and expenses. Please visit im.natixis.com or call us at 800-225-5478 for a prospectus or a summary prospectus containing this and other information. Read it carefully before investing.
ALPS Distributors, Inc. is the distributor for the Natixis Vaughan Nelson Mid Cap ETF. Natixis Distribution, LLC is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, LLC.
3312872.2.1
NTS000284
Direct Indexing: Checking the Box
Tax Management Update – Q1 2024
