694 / 708
4
•
Fund Family Shareholder Association
www.adviseronline.comHowever, the Russell MidCap index
outpaced both those indexes by over
2% per annum—an advantage that com-
pounds to significant gains over time.
One hundred dollars invested in the
Russell MidCap index at the end of
1978 would have grown to $11,152 by
the end of September 2016. That’s more
than double the return for large-cap
stocks, which would have grown to just
$5,446. And it’s over 70% greater than
the $6,491 gain you’d have earned from
small-caps. Check out the rolling return
stats in the table as well. Mid-caps’ per-
formance edge was not the result of one
outstanding period, as these stocks held
their advantage on average over rolling
three- and five-year time periods as well.
What about the risk side of the
equation? Well, as you can see in the
table, the Russell MidCap index hasn’t
been any more anxiety-producing to
hold than its large- or small-cap sib-
lings. Yes, its steepest decline, a loss
of 54.2% reached during the financial
crisis of 2008–2009, was deeper than
that experienced by small- and large-
cap stocks, but not by much. And if we
exclude the financial crisis, mid-cap
stocks have actually produced smaller
drawdowns. Or consider that the worst
five-year stretch for mid-cap stocks was
better than the worst five-year period
for large- or small-cap stocks.
To what can we attribute the success
of these middle children? Mid-sized
companies combine the growth char-
acteristics of small companies with the
financial stability of large ones, yet
they still fly under the radar of many
analysts who are focused only on the
biggest companies in the marketplace.
This doesn’t mean mid-cap stocks will
outperform year in and year out—noth-
ing in the investment world is so reli-
able—but for investors willing to invest
in this often-overlooked part of the mar-
ket, the rewards are meaningful extra
returns without significantly more risk.
With that said, let’s turn toVanguard’s
mid-cap index options and then its
actively-managed ones for specific rec-
ommendations.
Extended Market Index
Sell.
Extended Market Index
is a
vestige of the days when Vanguard was
looking for a “completion” index to com-
bine with
500 Index
as a means of index-
ing the entire U.S. stock market. I strug-
gle to see where this fund fits in today.
If you want to own the entire U.S.
stock market, why not just hold
Total
Stock Market
and be done with it?
And if you want mid-cap stocks, then
just buy a mid-cap index. Holding near-
ly 3,300 stocks, this sprawling port-
folio is really a smid-cap (small-cap
plus mid-cap) index that Vanguard has
lumped in with purer mid-cap funds.
Despite offering exposure to both
small and mid-cap stocks, Extended
Market Index’s annual gain of 7.2%
over the past 10 years trails both
MidCap Index
and
SmallCap Index
’s
7.3% pace. And MidCap Index has out-
performed by just over 2% per annum
since its inception.
For my money, I want to control how
much I have invested in large-caps ver-
sus mid- and small-caps. Well, you can
do that with various Vanguard index
funds, and for mid-caps, MidCap Index
is a better choice. And if you are an
index purist, you are probably looking
for the one-and-done option of Total
FOCUS
FROM PAGE 1
>
Many Ways to Index Mid-Cap Stocks
Extended Market Index
MidCap Growth Index
S&P MidCap 400 Growth ETF
Number of Stocks
3274
157
226
P/E
34.4
33.9
26.9
P/Book
2.4
4.7
3.6
Median Mkt. Cap. (billions)
$3.7
$12.8
$5.2
Foreign
0.3%
0.0%
0.0%
Cash
0.0%
0.0%
0.0%
Sector Allocation
Consumer Discretionary
14.1%
13.5%
12.7%
Consumer Staples
3.5%
10.5%
5.6%
Energy
4.1%
5.1%
0.0%
Financials
15.8%
14.9%
13.7%
Health Care
11.9%
12.2%
13.8%
Industrials
12.8%
23.6%
10.2%
Information Technology
18.0%
17.8%
22.6%
Materials
5.2%
0.4%
5.5%
Real Estate
10.0%
not reported
14.2%
Telecommunication
1.2%
2.0%
0.0%
Utilities
3.4%
0.0%
1.7%
Top 10
5%
14%
12%
1
Liberty Global
Ross Stores
IDEXX Laboratories
2
Tesla Motors
Edwards Lifesciences
WhiteWave Foods
3
Equinix
ResMed
4
Las Vegas Sands
Electronic Arts
CDK Global
5
FleetCor Technologies
Fiserv
Regency Centers
6
Incyte
Amphenol
ANSYS
7
BioMarin Pharmaceutical
Concho Resources
Broadridge Financial Sol.
8
Palo Alto Networks
Cerner
MSCI
9
SBA Communications
Roper Technologies
Packaging of America
10
Moody's
Cadence Design Systems
Growth
(POGRX), the alternative
for those closed out of PRIMECAP,
returned 4.3% over the past year. I’ll
have a full description of the strategy
and its performance history in next
month’s issue.
>
And finally, in case you missed it,
Vanguard is changing the name on
several “tax-free” funds to “munici-
pal” in the wake of the money market
reforms that took effect in October.
The change goes into effect sometime
in the first quarter of 2017. So, don’t
be surprised when you see new names
early next year. We’ll try to get every-
thing changed in our files, but if we
miss a name change, please don’t hold
it against us. We’ll get them fixed.
n