Are mid caps ever needed?

[chang]

Copying from another thread (about AVUV):

“Avantis also runs AVMV/AVMC, which I believe are midcap versions of AVUV/AVSC. However since my portfolio is essentially all LC, it seems more reasonable for me to “barbell” using AVUV … what would be the point of a MC fund?”

To put it more simply - are midcaps sandwiched between SC and LC performance wise? If so, then barbelling makes perfect sense. In my case, my port is almost entirely LC, so I started buying AVUV last year for a little bit of diversity and RTTM. I don’t see that a MC fund could add any value ….. UNLESS midcaps were uncorrelated to both SC and LC.

And that’s the question. Are MC’s sandwiched in between SC and LC (performance wise) or can they be uncorrelated for extended periods of time?

For the foreseeable future, I envision continuing to PyrUp AVUV.

[acksurf]

Mar 18, 2024 13:28:29 GMT chang said:

Copying from another thread (about AVUV):

“Avantis also runs AVMV/AVMC, which I believe are midcap versions of AVUV/AVSC. However since my portfolio is essentially all LC, it seems more reasonable for me to “barbell” using AVUV … what would be the point of a MC fund?”

To put it more simply - are midcaps sandwiched between SC and LC performance wise? If so, then barbelling makes perfect sense. In my case, my port is almost entirely LC, so I started buying AVUV last year for a little bit of diversity and RTTM. I don’t see that a MC fund could add any value ….. UNLESS midcaps were uncorrelated to both SC and LC.

And that’s the question. Are MC’s sandwiched in between SC and LC (performance wise) or can they be uncorrelated for extended periods of time?

For the foreseeable future, I envision continuing to PyrUp AVUV.

I am also mostly Large Caps except I don't have exposure to small caps.  I think I have too much experience working with "zombie" small companies - though there are some very good ones.  I currently have a small position in XMHQ (Invesco Mid-Cap) to get a feeling of how differently it behaves from my large cap funds.  I do have a fair amount of diversification with Large Value in an attempt to not have too much allocated to the "Magnificent 7".

[rhythmmethod]

Mar 18, 2024 13:28:29 GMT chang said:

Copying from another thread (about AVUV):

“Avantis also runs AVMV/AVMC, which I believe are midcap versions of AVUV/AVSC. However since my portfolio is essentially all LC, it seems more reasonable for me to “barbell” using AVUV … what would be the point of a MC fund?”

To put it more simply - are midcaps sandwiched between SC and LC performance wise? If so, then barbelling makes perfect sense. In my case, my port is almost entirely LC, so I started buying AVUV last year for a little bit of diversity and RTTM. I don’t see that a MC fund could add any value ….. UNLESS midcaps were uncorrelated to both SC and LC.

And that’s the question. Are MC’s sandwiched in between SC and LC (performance wise) or can they be uncorrelated for extended periods of time?

For the foreseeable future, I envision continuing to PyrUp AVUV.

I own and am adding to AVUV, which I consider to be more SCV. I also own VBK and VO which are small/mid cap(ish) growth leaning. The difference between value and growth are my reasons for owning all. Do I need them all? Probably not. 

[chang]

rhythmmethod It is possible that, to a first approximation, AVUV + VBK ≈ VBR + VBK = VB. Hence, you might plausibly own VB in lieu of equal amounts of SCV and SCG. (If you own unequal amounts, then of course you have more flexibility with both.)

VO is MC hence another kettle of fish.

I remain unconvinced that MC are needed if one barbells, unless it can be demonstrated that they are (in some significant way) uncorrelated to SC and LC.

[roi2020]

I compared IVV (S&P 500), IJH (S&P 400), and IJR (S&P 600) from Jun 2000 - February 2024.
IJR generated slightly higher returns (+ 0.13%) than IJH during this period albeit with greater volatility and a larger max drawdown.
IJH generated higher returns than IJR for the trailing 3 yr, 5 yr, and 10 yr periods ending February 2024.
www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=2TZ0aiq1BnvPpnTFZA1Sag

Results will vary for different index providers like CRSP, Russell, and Dow Jones.
Each index provider has its own distinct process for classifying mid-cap stocks.
www.morningstar.com/etfs/reading-fine-print-mid-cap-etfs

[steadyeddy]

I only use VB as a supplement to my Large cap holdings. In essence, I ignore MidCap.

[retiredat48]

 chang,acksurf,rhythmmethod,roi2020,steadyeddy,...A case for midcaps is this:

--First, the Boglehead.org forum had early members who did lot's of analysis of historical returns.  You see, the infamous Fama-French stock market studies since 1920 only assessed small caps versus large caps.  Most are surprised that a free lunch (of three)in the markets was that small caps beat large caps.  This was true to about end of study a decade+ or so ago.  (Since, large caps high tech have trounced).

--Bogleheads discovered that mid caps were actually beating small caps.  They labeled this space: THE UNLOVED MIDCAPS.  Some even conservative indexers preferred mid cap over small cap.

--I see where mid caps are currently leading versus small caps in the last various periods.  I use momentum in my investing.  So mid caps have my attention.

--successful small caps become mid caps; thus mid caps are generally of higher quality, a current theme desired by many.  (And some mid caps become great large caps)

--some mid caps may be better positioned to improve because of all aspects of AI.  

Bottom line.  The market speaks.  Mid caps are winning (but not by a wide margin).  I may go with a midcap fund in addition to my pry up going on with AVUV small cap.  I also own a USA core small cap holding...held for a long time/not added to for a long time!

R48

[liftlock]

I have always considered Mid Caps to be in the sweet spot of long investment returns, providing small cap returns with much less small cap risk. One downside of many mid cap funds is they drop their best performing stocks when they become too large.  I seem to recall a post a while back about a fund that held onto there winners and let them run.   This strategy makes sense to me.  I don't recall who made the post or the name of the fund.  

[fishingrod]

Mar 18, 2024 21:04:16 GMT liftlock said:

I have always considered Mid Caps to be in the sweet spot of long investment returns, providing small cap returns with much less small cap risk. One downside of many mid cap funds is they drop their best performing stocks when they become too large.  I seem to recall a post a while back about a fund that held onto there winners and let them run.   This strategy makes sense to me.  I don't recall who made the post or the name of the fund.  

I think VO midcap uses buffer zones to allow outperforming midcaps to stay in the index longer. And it is a favorite of some Bogleheads instead of small caps.

[yogibearbull]

fishingrod, I think that buffer zones & gradual changes are part of CRSP methodology for all its indexes. So, it applies to VO too.

[chang]

I plotted VB vs. VO vs. VV over 1, 3, 5, 10 years. In all cases, VO is sandwiched in between VB and VV. (Over this time period, total returns end up with VV > VO > VB, which in itself is a RTTM case for small caps.)

So, I am still not seeing a case for midcaps if one owns SC and LC and expects MC to be sandwiched in-between. I don’t know about R48’s "Boglehead analysis", but the charts do not seem to be showing it.

[fishingrod]

Mar 18, 2024 22:13:45 GMT chang said:

I plotted VB - VO - VV over 1, 3, 5, and 10 years. In all cases, VO is sandwiched in between VB and VV. So I am still not seeing a case for midcaps if one owns SC and LC. I don’t know about R48’s Boglehead analysis, but the charts aren’t showing it.

Has recency bias pervaded the whole market instead of just investors at the individual level?

I feel the last 15 years are skewed. But the out performance of large caps could last a while.

Then again....

I think the case for mid caps are in in getting some of the performance of smaller caps without the full harsh volatility of small caps.

[roi2020]

Most major index providers have overlap between indexes for various U.S. market size segments.
Investors who "slice and dice" indexes should be aware of this.

The CRSP U.S. Large Cap Index captures the top 85% of stocks by market cap.
The CRSP U.S. Mid Cap Index captures stocks with 70% - 85% of market cap and overlaps 100% with the CRSP U.S. Large Cap Index.

The Russell 1000 Index represents the top 1000 stocks by market cap.
The Russell Midcap Index includes the top 201 - 1000 stocks by market cap and overlaps 100% with the Russell 1000 Index.

The Dow Jones U.S. Mid-Cap Total Stock Market Index is comprised of stocks included in the Dow Jones large cap and small cap indexes.

If an investor holds funds based on the large cap and small cap indexes from a single provider (CRSP, Russell, Dow Jones),
all stocks in the provider's mid cap index are included by default.
This fund mixture will include all stocks (except potentially micro-cap) which comprise the provider's "total market" index but stock proportions may differ.

There is no overlap between the S&P 500, S&P 400, and S&P 600 indexes.

[yogibearbull]

LC, MC, SC

Mid-cap (MC) universe is small and interesting.

Composite SP1500 (ITOT) includes LC SP500 (IVV), MC-400 (IJH), SC-600 (IJR).

Total Russell R3000 (IWV) includes LC/MC R1000 (IWB), SC R2000 (IWM).

Completion indexes (VXF) are total stock market (VTI) minus SP500 (VOO), so that is LC/MC.

So, MC is a small universe by number of stocks that is sandwiched between LC and SC. Often, it is combined as LC/MC or MC/SC.

A good thing about MC is that it includes overgrown SCs, fallen LC, and genuine MC.

[johntaylor]

Have RPTIX, average annual total return 13% since 1992

[acksurf]

Mar 18, 2024 19:35:08 GMT retiredat48 said:

 chang ,acksurf ,rhythmmethod ,roi2020 ,steadyeddy ,...A case for midcaps is this:

--First, the Boglehead.org forum had early members who did lot's of analysis of historical returns.  You see, the infamous Fama-French stock market studies since 1920 only assessed small caps versus large caps.  Most are surprised that a free lunch (of three)in the markets was that small caps beat large caps.  This was true to about end of study a decade+ or so ago.  (Since, large caps high tech have trounced).

--Bogleheads discovered that mid caps were actually beating small caps.  They labeled this space: THE UNLOVED MIDCAPS.  Some even conservative indexers preferred mid cap over small cap.

--I see where mid caps are currently leading versus small caps in the last various periods.  I use momentum in my investing.  So mid caps have my attention.

--successful small caps become mid caps; thus mid caps are generally of higher quality, a current theme desired by many.  (And some mid caps become great large caps)

--some mid caps may be better positioned to improve because of all aspects of AI.  

Bottom line.  The market speaks.  Mid caps are winning (but not by a wide margin).  I may go with a midcap fund in addition to my pry up going on with AVUV small cap.  I also own a USA core small cap holding...held for a long time/not added to for a long time!

R48

Yeah I think that was "Mel"; Mel's unloved midcaps!

[rhythmmethod]

Mar 18, 2024 16:25:14 GMT chang said:

rhythmmethod It is possible that, to a first approximation, AVUV + VBK ≈ VBR + VBK = VB. Hence, you might plausibly own VB in lieu of equal amounts of SCV and SCG. (If you own unequal amounts, then of course you have more flexibility with both.)

VO is MC hence another kettle of fish.

I remain unconvinced that MC are needed if one barbells, unless it can be demonstrated that they are (in some significant way) uncorrelated to SC and LC.

I'm unconvinced as well. As I go forward I may liquidate VO into the other two. I like the AVUV process.

[archer]

Using PV efficient frontier, it appears that small caps give little gain over mid caps but ther SD is much greater. Midcap vs large cap has more gain for the amount of increased SD. Risk adjusted return as per Sharpe is about the same for all 3.

www.portfoliovisualizer.com/efficient-frontier?s=y&sl=6iKlwOOATHQ01LhV2exnca

[chang]

Here's a 10Y chart of VB (SC) vs VO (MC) vs VV (LC). (Click to enlarge.)



Here's the 20Y chart. (Click to enlarge.)



Here we're starting to see a few interesting things. A pity that M* no longer shows rolling returns. TR is highly sensitive to starting and ending dates, so it's difficult to conclude that MC is actually doing better (than SC or LC) "during" a particular period on the chart.

[anovice]

Mar 19, 2024 4:28:53 GMT archer said:

Using PV efficient frontier, it appears that small caps give little gain over mid caps but ther SD is much greater. 

www.portfoliovisualizer.com/efficient-frontier?s=y&sl=6iKlwOOATHQ01LhV2exnca

Isn't this a good reason to favour mid caps over small caps?

[yogibearbull]

chang, PV has Rolling Returns tab that has 3-yr & 5-yr rolling returns over the PV run.
www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=76FVRymzu0RgDnI7Q8DV5R

[chang]

Thanks yogibearbull. I haven’t used PV before, but I will try it today. RR’s are very useful; TR’s are often nearly useless because of start- and end-point sensitivity.

[yogibearbull]

A reminder about various guides/primers/pointers that are available,
big-bang-investors.proboards.com/thread/2932/web-tools-pv-sr-mfo

[mnfish]

Mar 19, 2024 7:12:21 GMT chang said:

Here's a 10Y chart of VB (SC) vs VO (MC) vs VV (LC). (Click to enlarge.)

View Attachment

Here's the 20Y chart. (Click to enlarge.)

View Attachment

Here we're starting to see a few interesting things. A pity that M* no longer shows rolling returns. TR is highly sensitive to starting and ending dates, so it's difficult to conclude that MC is actually doing better (than SC or LC) "during" a particular period on the chart.

When I plugged the ETFs in to PV using the same period, what I found interesting is that VV(large) paid $5,624 in divs compared to $3,811 for VO(mid) and $3,158 for VB(small). 

FWIW - Wells Advisors still has SC rated as "most unfavorable"

[retiredat48]

Nice informational posts, all.

Two things in my investing:

1.  I like to take the most recent RISE off of a bottom (like maybe last october lows, or last couple months off of a low point) to do comparison runs as to the best potential fund future gains.

2.  I don't need to resolve or decide on small caps vs mid caps, to invest in today.  The market tells me where to go...using MOMENTUM to your advantage.  If mid caps are beating small caps now, that is where one should go.  Simple.  The fact mid caps have less volatility in down markets could also be a tipping factor.

I will be reallocating some more of one of my daughters IRAs, to either mid caps or small caps.  Currently it will be a mid cap!

See.....easy!  Now deciding which fund.

R48

[chang]

retiredat48 I don’t know exactly how you define “now”, but compared AVUV-AVMV-AVLV over 15 days, 30 days, and 90 days, and both MC and LC are way ahead of SC.

[retiredat48]

Mar 19, 2024 16:37:37 GMT chang said:

retiredat48 I don’t know exactly how you define “now”, but compared AVUV-AVMV-AVLV over 15 days, 30 days, and 90 days, and both MC and LC are way ahead of SC.

@chang ,...That's the point.

I was reentering to edit my post to add:  "I will also offer chang a $10 sidebet that, starting from the day he accepts the bet, mid caps will beat small caps by 31 December of this year!

Now off to late breakfast.

R48

[chang]

As a rule I never bet, but if SC is leading MC by 5-10% on December 1st I’ll probably take it!

I’ll keep my eye on AVMV. It’s new and still thinly traded, so maybe a super lowball order will fill.

[richardsok]

Mar 19, 2024 18:04:18 GMT chang said:

As a rule I never bet, but if SC is leading MC by 5-10% on December 1st I’ll probably take it!

I’ll keep my eye on AVMV. It’s new and still thinly traded, so maybe a super lowball order will fill.

Hm.  Nice chart.  I'm seeing some resistance here, though.

[anitya]

An indication of what can be subject to quick investor mood changes -

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