Small caps are gathering significant attention right now, and for good reason. The category appears set to benefit from rate cuts filtering through the economy, easing borrowing costs for smaller firms. That has seen investors dive into the category with growing excitement. While it does offer a strong case, those same investors may not want to skip over another key category benefitting from rate cuts: midcaps.
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The middle child between small-cap upside and large-cap dominance, midcaps can sometimes be forgotten. Smart investors, however, may want to give midcaps a look before doing anything of the sort. Midcaps can combine many of the advantages present in smaller companies with the scale provided by large cap companies.
Small-caps vs. Midcaps
Midsized companies may be less vulnerable than small-caps, facing less negative impact from high interest rates. That doesn’t mean they benefit drastically less from rate cuts, mind; midsized firms must borrow to grow, too. Their larger size may equip them to take bigger leaps, which can pay off for savvy investors.
As an overlooked category, then, how might investors best approach midsized names? A value approach via a fund like the Avantis U.S. Mid Cap Value ETF (AVMV ) could appeal. AVMV actively invests in midcap names that meet its value screens. Charging just 20 basis points, the strategy targets highly profitable midcap firms. Specifically, it looks for companies with appealing cash flows, revenue, expenses, price-to-book values, and more.
That has helped AVMV return 18.37% over the last year, per Avantis Investors data, as of December 31. That helped the fund beat its benchmark, the Russell Midcap Value Index, in that time. For those looking to get some of the best parts of small- and large-cap names, compelling midcaps deserve greater scrutiny.
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