Mid caps

Market Capitalization
Stocks may be classified by the size of the corporation. This is most commonly done looking at the market capitalization. Market capitalization is simply a measurement found by taking a stock's current share price and multiplying it by the number of stock shares outstanding. Exact market cap ranges will vary among different financial and rating institutions, but there are three different terms commonly used to describe stocks by their general size: Large Cap stocks; Mid Cap stocks; and Small Cap stocks. Market cap terms are relative and are constantly changing as companies get bigger and smaller.

In terms of the market size ranges spanned by Mid cap indexes, most mid cap stocks comprise the range below the 70% of the market capitalization occupied by large caps and above the bottom 10% occupied by small cap stocks. The percentile ranges of market capitalization from index providers is included in the following table:

US Markets
Since 1975, investors have been able to index US Large Cap stocks. Since the early 1990's investors have been able to index US Market and US Mid Cap Stocks. Vanguard Mid Cap Value and Growth Indexes were introduced in 2006. The returns of Vanguard funds are provided in the following three tables. For comparison, both Large and Small Cap fund returns are included. Table 5 shows returns in the 1990's, a period dominated by the returns of Large Cap Growth Stocks; Table 6 shows returns in the 2000's, when Mid Cap, Small Cap and Value stocks provided premium returns; Table 7 provides returns over the entire period. Vanguard indexed the Large Growth, Large Value, and Mid Cap indexes from inception to May 2003 in S&P style indexes. Since May 2003 all of the style funds have been indexed to MSCI indexes.

Vanguard Mid Cap Funds
Vanguard provides 9 Mid Cap mutual funds, three of which are currently closed to new investors.
 * Capital Value (Closed-active value)
 * Selected Value (active value)
 * Mid Cap Value Index
 * Strategic Equity (active blend)
 * Extended Market Index
 * Mid Cap Index
 * Capital Opportunity (Closed-active growth)
 * Capital Opportunity Admiral shares (Closed-active growth)
 * Mid Cap Growth Index

Index Funds and ETFs
In addition to Vanguard, Fidelity and T.Rowe Price offer extended market index funds, and Dreyfus offers a mid cap index fund. According to IndexUniverse.com, a total of 24 non sector mid cap ETFs are currently available. The major ETF managers are included in the table below. One should note that Powershares ETFs are indexed to proprietary quasi-active indexes (the Intellidex series).

Tax Efficiency
Actively managed mid cap funds are not very tax efficient. Active funds tend to distribute hefty capital gains distributions. While the Vanguard Extended Market and Vanguard Mid Cap Index funds distributed capital gains during the long bull market of the eighties and nineties, they are currently very tax efficient as a result of the following three factors:
 * 1) The benchmarking of the funds to MSCI indexes which utilize transition bands between size and valuation metrics. These bands tend to reduce the turnover of stocks as they migrate across indexes, which helps reduce taxable gain realization.
 * 2) The accumulation of realized loss carryforwards from the 2000-2002 and 2008 bear markets. These carryforwards can be applied to offset future realized gains in the funds through fiscal year 2017. Active small cap funds tend to realize gains at a much quicker rate than do index funds. This tendency results in active funds depleting loss carryforwards much faster than index funds.
 * 3) The ETF share classes of Vanguard index funds, through the institutional creation and redemption process of ETF shares, serve to enhance the funds' tax efficiency by gradually removing low basis stock from the fund portfolios and by stabilizing the funds' level of loss carryforwards.

Under current law, qualified dividends are taxed at lower capital gains tax rates. The qualified dividends a mid cap index fund passes on to shareholders is reduced by the holding periods of a fund's purchases and sales of stocks and by the extent of a fund's holding of REITS, whose dividends are unqualified. Mid cap value index funds provide higher dividend payouts than do mid growth or mid blend indexes. Since the 2004 advent of ETF share classes in the index funds, none have distributed a capital gains distribution: