Why is mid-cap discussed so much less than large and small?

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kidfresh
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Why is mid-cap discussed so much less than large and small?

Post by kidfresh »

Why is there so much discussion of large- and small-cap investing, diversification, tilting, etc. - while mid-cap is hardly discussed at all?

Thanks for any responses!
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timboktoo
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Re: Why is mid-cap discussed so much less than large and sma

Post by timboktoo »

My guess is that there's more correlation between either mid cap and large or mid cap and small than there is between large and small. People who are trying to slice and dice a portfolio are looking to maximize risk-adjusted returns by purchasing uncorrelated assets that each have high returns.

I find the Three Fund Portfolio to be all I need, personally.

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Re: Why is mid-cap discussed so much less than large and sma

Post by gkaplan »

Mel, do you want to chime in here?
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Re: Why is mid-cap discussed so much less than large and sma

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Re: Why is mid-cap discussed so much less than large and sma

Post by hexagon »

As gkaplan refers to, Mel has made persuasive (at least to me) arguments for mid-caps--try searching "Mel's unloved midcaps". Here are two of the previous discussions:

http://www.bogleheads.org/forum/viewtopic.php?t=11153
http://www.bogleheads.org/forum/viewtopic.php?t=2571‎
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nedsaid
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Re: Why is mid-cap discussed so much less than large and sma

Post by nedsaid »

If you are looking for a "Tiger in the Tank" for your portfolio, small caps and particularly small cap value put more "kick" into your portfolio. That comes at the price of higher volatility.

The mid-caps are a happy medium between small and large. Most of the growth potential from small caps but less volatility. Some people believe that mid-caps are the "sweet spot" in the stock market.

The academic research talks a lot about value and small-cap premiums. So a lot of people invest in small cap indexes and small cap funds to get the small premium. A lot of small value funds are closed to investors. Some folks think the Vanguard Small Cap Value Fund and ETF aren't small-ee and value-ee enough compared to the DFA Funds. Some folks go to the mid-cap funds as a substitute.

The reality is that a lot of "small-cap" funds have a lot of mid-caps in them anyway. An International Small-Cap Index ETF that I purchased was about 50% mid-cap. Managers of small-cap funds like to wade into the mid-cap arena because these stocks are more liquid and easier to trade.

I like mid-caps. I have invested in them particularly through a couple of mid-cap growth funds. The small cap funds I have used have mid-caps in them. This area of the market has my endorsement.
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Re: Why is mid-cap discussed so much less than large and sma

Post by livesoft »

Anytime someone mentions small-caps, they are also discussing mid-caps. Look at the percentage of mid-caps in Vanguard's small-cap value index fund. Look at the percentage of mid-caps in Vanguard's all-world FTSE ex-US foreign small-cap index fund. And for that matter, look at the percentage of mid-caps in Vanguard's large-cap index fund.

Basically, one cannot avoid having mid-caps even if they have funds without mid-cap in their names.
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Re: Why is mid-cap discussed so much less than large and sma

Post by Call_Me_Op »

kidfresh wrote:Why is there so much discussion of large- and small-cap investing, diversification, tilting, etc. - while mid-cap is hardly discussed at all?
Because the average of large and small is somewhere in the middle.
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Re: Why is mid-cap discussed so much less than large and sma

Post by nisiprius »

It is an interesting question, because, as is so often the case, the growth charts don't match the talk. The talk is all "small" and "small value" and "heavy factor loading." But a casual lay glance suggests that the differences between "large" and "not large" are way bigger than the differences between "medium" and "small."

I think that 1) a lot of the talk is associated with a region of the financial thinking universe that orbits around Fama and French, and that 2) the mutual fund company DFA (Dimensional Fund Advisors) orbits around Fama and French, and 3) DFA does not appear to have any mid-cap funds, so I guess that mid-caps just do not have any place in that philosophical school of thought.

Not sure if the early years here should "count"--I never know what to think of differences attributable to the first year or two of a fund's existence--but the pattern of fluctuations, and thus I suppose correlations with other asset classes and any hoped-for rebalancing bonus, must be very similar, with all the advantages in return being in mid-cap's favor.

The whole picture (since inception of Vanguard Mid-Cap Index)
Image

Last thirteen years:
Image

Add the "value" factor, and the available Vanguard funds are again extremely similar (only seven years of data though):
Image
Last edited by nisiprius on Tue Apr 15, 2014 9:44 am, edited 1 time in total.
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Re: Why is mid-cap discussed so much less than large and sma

Post by livesoft »

nisiprius wrote:I will say that a lot of the talk is associated with a region of the financial thinking universe that orbits around Fama and French, and that the mutual fund company DFA (Dimensional Fund Advisors) orbits around Fama and French, and DFA does not appear to have any mid-cap funds, so I guess that mid-caps just do not have any place in that philosophical school of thought.
My impression is that any DFA fund with"large-cap" in the name is actually a mid-cap fund, so that mid-caps are prominently featured by DFA, but are not labelled as such.
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Re: Why is mid-cap discussed so much less than large and sma

Post by YDNAL »

kidfresh » Tue Apr 15, 2014 9:30 am

Why is there so much discussion of large- and small-cap investing, diversification, tilting, etc. - while mid-cap is hardly discussed at all?
Because people like "discussions."

There are MID caps in almost everything considered "LARGE or SMALL" -- that is, unless we purposely/exclusively invest in MEGA caps or MICRO caps.
Vanguard Mega Cap ETF (MGC)
RBC Microcap Value A TMVAX
Even Vanguard MGC, according to Morningstar's Methodology, includes 3% MID caps.
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Re: Why is mid-cap discussed so much less than large and sma

Post by nisiprius »

livesoft wrote:
nisiprius wrote:I will say that a lot of the talk is associated with a region of the financial thinking universe that orbits around Fama and French, and that the mutual fund company DFA (Dimensional Fund Advisors) orbits around Fama and French, and DFA does not appear to have any mid-cap funds, so I guess that mid-caps just do not have any place in that philosophical school of thought.
My impression is that any DFA fund with"large-cap" in the name is actually a mid-cap fund, so that mid-caps are prominently featured by DFA, but are not labelled as such.
That is a really interesting thought, but at first glance...

DFA Large Cap International DFALX
Image

DFA US Large Company I DFUSX
Image

DFA US Large Cap Value I DFLVX
Image

none of which look middier to me than plain old S&P 500, which itself is slightly polluted with midcaps...
Vanguard 500 Index VFINX
Image

However, I wonder if you were thinking of this fund?
DFA US Core Equity 1 I DFEOX
Is that their all-in-one general-purpose this-is-how-much-tilt-we-think-joe-sixpack-should-have fund?
Image

I guess DFEOX does represent a conscious allocation to mid-caps, because the numbers look like this
Image

Compared to the actual barbell weighting, more small than mid, in
FlexShares Mstar US Mkt Factors Tilt ETF TILT
Image
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Re: Why is mid-cap discussed so much less than large and sma

Post by steve_14 »

kidfresh wrote:Why is there so much discussion of large- and small-cap investing, diversification, tilting, etc. - while mid-cap is hardly discussed at
Why isn't there much discussion of the 8th stock decile, market-cap wise? I dunno, why isn't there much discussion of the 4th size decile? These are all bits of the market you should own to maximize diversification. Small caps get discussed a lot because a) there's an army of investment advisors promoting them, and b) they may be different enough from large caps to offer a slight risk/return boost, though I don't expect this at current valuations.
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Re: Why is mid-cap discussed so much less than large and sma

Post by livesoft »

nisiprius wrote:
livesoft wrote:My impression is that any DFA fund with"large-cap" in the name is actually a mid-cap fund, so that mid-caps are prominently featured by DFA, but are not labelled as such.
That is a really interesting thought, but at first glance…
...
Thanks for doing the research. My impression was clearly wrong.
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Re: Why is mid-cap discussed so much less than large and sma

Post by Ketawa »

steve_14 wrote:
kidfresh wrote:Why is there so much discussion of large- and small-cap investing, diversification, tilting, etc. - while mid-cap is hardly discussed at
Why isn't there much discussion of the 8th stock decile, market-cap wise? I dunno, why isn't there much discussion of the 4th size decile? These are all bits of the market you should own to maximize diversification. Small caps get discussed a lot because a) there's an army of investment advisors promoting them, and b) they may be different enough from large caps to offer a slight risk/return boost, though I don't expect this at current valuations.
So you're willing to make predictions about future returns based on small cap valuations, but not when it comes to value stocks. Got it.
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Re: Why is mid-cap discussed so much less than large and sma

Post by kidfresh »

steve_14 wrote:
kidfresh wrote:Why is there so much discussion of large- and small-cap investing, diversification, tilting, etc. - while mid-cap is hardly discussed at
Why isn't there much discussion of the 8th stock decile, market-cap wise? I dunno, why isn't there much discussion of the 4th size decile? These are all bits of the market you should own to maximize diversification. Small caps get discussed a lot because a) there's an army of investment advisors promoting them, and b) they may be different enough from large caps to offer a slight risk/return boost, though I don't expect this at current valuations.
That's misleading. Many of the authors recommended on this website's reading list at least discuss (if not outright propose) small and value tilt for those willing to take on the extra risk. They may not know everything, but I don't lump their analysis in with the pitch of the local Fidelity sales rep.
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Re: Why is mid-cap discussed so much less than large and sma

Post by steve_14 »

Ketawa wrote:
steve_14 wrote:
kidfresh wrote:Why is there so much discussion of large- and small-cap investing, diversification, tilting, etc. - while mid-cap is hardly discussed at
Why isn't there much discussion of the 8th stock decile, market-cap wise? I dunno, why isn't there much discussion of the 4th size decile? These are all bits of the market you should own to maximize diversification. Small caps get discussed a lot because a) there's an army of investment advisors promoting them, and b) they may be different enough from large caps to offer a slight risk/return boost, though I don't expect this at current valuations.
So you're willing to make predictions about future returns based on small cap valuations, but not when it comes to value stocks. Got it.
I believe exactly what Vanguard believes in their published research: that valuations do, on average (though certainly not always) affect returns, while the "value premium" isn't worth chasing down.
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Re: Why is mid-cap discussed so much less than large and sma

Post by steve_14 »

kidfresh wrote:
steve_14 wrote:
kidfresh wrote:Why is there so much discussion of large- and small-cap investing, diversification, tilting, etc. - while mid-cap is hardly discussed at
Why isn't there much discussion of the 8th stock decile, market-cap wise? I dunno, why isn't there much discussion of the 4th size decile? These are all bits of the market you should own to maximize diversification. Small caps get discussed a lot because a) there's an army of investment advisors promoting them, and b) they may be different enough from large caps to offer a slight risk/return boost, though I don't expect this at current valuations.
That's misleading. Many of the authors recommended on this website's reading list at least discuss (if not outright propose) small and value tilt for those willing to take on the extra risk. They may not know everything, but I don't lump their analysis in with the pitch of the local Fidelity sales rep.
But aren't they all financial advisors?
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Re: Why is mid-cap discussed so much less than large and sma

Post by Epsilon Delta »

Because when you have a hammer everything looks like a nail.

If you treat market capitalization as a single variable you can plug this into regression analysis, or similar, and see how market cap affects the result. This is discussed as large v. small but the tools really measure things across the full spectrum of market caps.

if you want to look at mid caps, you'd have to define what a mid cap is. There is no obvious measure that is high for mid caps and low for small or large caps. This means you have to define ranges to divide the market into discrete groups. Not only is this more work but moving from a continuous to a discrete distribution loses information and makes the statistical tests less powerful. A less powerful test is less likely to come up with something you can publish.
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Re: Why is mid-cap discussed so much less than large and sma

Post by kidfresh »

steve_14 wrote:
kidfresh wrote:
steve_14 wrote:
kidfresh wrote:Why is there so much discussion of large- and small-cap investing, diversification, tilting, etc. - while mid-cap is hardly discussed at
Why isn't there much discussion of the 8th stock decile, market-cap wise? I dunno, why isn't there much discussion of the 4th size decile? These are all bits of the market you should own to maximize diversification. Small caps get discussed a lot because a) there's an army of investment advisors promoting them, and b) they may be different enough from large caps to offer a slight risk/return boost, though I don't expect this at current valuations.
That's misleading. Many of the authors recommended on this website's reading list at least discuss (if not outright propose) small and value tilt for those willing to take on the extra risk. They may not know everything, but I don't lump their analysis in with the pitch of the local Fidelity sales rep.
But aren't they all financial advisors?
Isn't John Bogle just a financial advisor then? ;)
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