Mid-cap funds have long been the sweet spot for stock investors. Over the last five years alone, they have returned 19 percent, handily beating large-cap stocks, which make up much of the Standard & Poor’s 500 Index. They have also held their own compared with the more volatile small-cap stocks, which have stumbled this year.
One reason mid-caps have been doing so well is that they have the best of both worlds. They’re as nimble as small-cap companies, and their earnings increase faster than at large-cap companies. Yet like large-caps, their earnings are less volatile than those of small-cap companies. And there’s a bonus: Mid-caps often distribute some of their profits to shareholders in the form of dividends.
Continue Reading Below
We screened for actively managed funds that outperform the average fund most consistently. The search yielded a number of surprises. One was the Vanguard Strategic Equity fund, which had a 26 percent return over the 12 months ending in May of this year compared with 5 percent for the S&P 500. Although it’s actively managed, it still shares one quality with Vanguard’s passive index funds: low cost. With an expense ratio of 0.28 percent, its fees are well below the 1.3 percent average of other actively managed mid-cap funds, a factor that contributes to its impressive performance.
Explore other investing topics in the Consumer Reports Investing Center.
Another curiosity was the Oceanstone Fund. The fund garnered attention for its exceptional performance in 2009 and 2010. It had an incredible 100 percent return during a 12-month period ending in May 2010. More recently, its performance hasn’t been keeping pace—the fund returned 13 percent in the last year—but it still outperforms the average mid-cap value fund 80 percent of the time.
There was a surprise even among the largest mid-cap exchange-traded funds. Although most of the mid-cap exchange-traded funds deliver similar returns, the iShares Select Dividend ETF is an outlier in that it hasn’t lost money during a single 12-month period since 2009, and it has generated a return in excess of 20 percent annually in the last five years. There’s no guarantee that its impressive performance will continue, but it attests to the power of dividend-oriented investments.
If you’re considering buying into a mid-cap fund, you should know that investors have been bidding up prices recently. Mid-caps generally do well over the long term, often outperforming small-caps and large-caps, but they’re beginning to look pricey. The overall trailing price-to-earnings ratio for mid-caps rose to 21 as of mid-June, significantly higher than the S&P 500’s 18.3 price-earnings ratio. —Chris Horymski
Copyright © 2005-2014 Consumers Union of U.S., Inc. No reproduction, in whole or in part, without written permission. Consumer Reports has no relationship with any advertisers on this site.