Midcap stocks beat the S&P 500 in 30-year MarketWatch analysis
MarketWatch columnist Brett Arends says the S&P MidCap 400 outpaced the S&P 500 over three decades, with less concentration and a lower valuation.
By Sal Moretti · Money Reporter
3 min read
The S&P 500 may be the default pick in many retirement accounts, but MarketWatch columnist Brett Arends says a less famous U.S. stock benchmark has delivered the better long-term ride.
In an analysis published July 18, Arends compared the S&P 500, the heavyweight index of large American companies, with the S&P MidCap 400, which tracks midsize firms. His conclusion: over the past 30 years, the midcap index came out ahead by a wide margin.
Arends calculated that a $10,000 investment made in July 1996 in the State Street SPDR S&P Midcap 400 ETF, with dividends reinvested and taxes ignored, would now be worth about $226,000. That works out to an average compound return of almost 11% a year, according to his analysis.
The same $10,000 put into the State Street SPDR S&P 500 ETF Trust over that period would have grown to about $188,000, Arends wrote. That is roughly 17% less, with an average compound return of 10.3%.
Risk depends on how it is measured
Arends said the S&P 500 looked safer under the Wall Street habit of treating volatility as a stand-in for risk. On measures such as the Sortino ratio, the large-company index scored better in his analysis.
Other yardsticks told a different story. Arends wrote that the largest temporary loss, or drawdown, was slightly worse for the S&P 500, at 51%, compared with 49% for the S&P MidCap 400.
The gap widened when he looked at the weakest rolling periods for investors. Arends said the S&P 500 had worse worst-case results than the midcap index across one-, three-, five-, seven-, 10- and 15-year spans.
One example stood out in his review: during its worst 10-year stretch, the S&P 500 lost an average of 3.5% a year. During the S&P MidCap 400’s worst 10-year run, investors still earned a positive average return of 3.6% a year, according to Arends.
He also pointed to the long slump after the 2000 market peak. Adjusted for inflation, Arends wrote, the S&P 500 did not recover its September 2000 high until May 2013. The S&P MidCap 400 took less than nine years to get back to its old level, measured to the brief bottom of the 2008-09 crash.
Less top-heavy, and cheaper
Arends said the midcap index also looks more diversified. The S&P 500 has become heavily tied to a small group of technology leaders, including Nvidia, Apple and Microsoft, he wrote.
According to the column, the five biggest holdings in an S&P 500 index fund make up 29% of the fund’s value. In the S&P MidCap 400, the top five account for 4.1%.
Valuation is another point in the midcap index’s favor, according to Arends. He wrote that the S&P MidCap 400 trades at 16 times forecast per-share earnings, while the large-cap S&P 500 trades at a price-to-earnings ratio above 20.
The S&P MidCap 400 includes companies ranging from Boston Beer, valued at about $1.7 billion, to cloud-communications company Twilio, valued at $33 billion, according to the column.
Arends cautioned that past results do not settle what happens next. He also noted that many financial advisers say investors do not have to pick one index over the other and can hold both.
This story draws on original reporting from MarketWatch.