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You want the hottest mutual funds? They’re right in front of you, in the middle of the road.
Big-company stocks still haven’t recovered from the bear market -- the S&P 500 Index ($INX) is still 10% below its level in March of 2000. Small stocks have done better, gaining about 10%. But mid-capitalization stocks have defied their brethren and spurted more than 50%.
And last week’s market panic was a reminder their high returns don’t involve extremely high risk, as do many more-volatile markets. Just look at how two funds in those markets performed: While Fidelity Latin America (FLATX) tumbled 11.8% in the seven days ending May 17, Vanguard Mid Capitalization Index (VIMSX) was down only 5.5%.
Mid-caps are Goldilocks stocks, not so small that they risk going out of business but not so large they can’t grow by leaps and bounds. Nucor (NUE, news, msgs), a steel maker that is the largest holding of the Vanguard Mid-Cap Index, has grown its profits an annual average of 55% for the last five years.
Mid-cap, low price
Mid caps is where fortunes are made. These companies-on-the-make can produce outsize earnings by entering new markets, and even creating new markets, and not merely by gaining share from existing markets or by cutting costs. Nobody is making a fortune in Wal-Mart Stores (WMT, news, msgs) or Home Depot (HD, news, msgs) or McDonald's (MCD, news, msgs) today, but millions did when they were still up-and-comers.This is true of small-caps, as well. But because mid caps are survivors -- they have already proven themselves in the marketplace -- they are much less risky. This is one reason indexing is so effective with this group: The entire cohort is stronger than companies in general.
That means exchange-traded index funds, the cheapest kind to operate, are ideal investment candidates. But conventional mutual funds have much to recommend them, and they’re the only way you can buy active management, whose goal is to beat the market rather than just keep up with it.
Here are seven excellent options among mid-cap equity funds. If you've overlooked middle-of-the-road companies in your portfolio, one of these could fill that lane very effectively.
| Right-down-the-middle funds | Performance | Expenses | ||
|---|---|---|---|---|
ETFs | 1 year | 3 year | 5 year | |
22.50% | 22.30% | n/a | 0.20% | |
23.1 | 21.1 | 9.4 | 0.20% | |
25.5 | n/a | n/a | 0.13% | |
S&P Mid Deposit RCPT (MDY) | 22.5 | 20.9 | 9.2 | 0.25% |
Mutual Funds | ||||
Vanguard Mid-Cap Index (VIMSX) | 25.1 | 22.8 | 10.4 | 0.22% |
Fairholme (FAIRX) | 21.4 | 22.1 | 14.6 | 1% |
Primecap Odyssey Aggressive Growth (POAGX) | 23.9 | n/a | n/a | 1.25% |
Notes: As of May 16, 2006. N/A -- Not applicable. Sources: MSN Money, Morningstar.
Of these seven funds, only the last two are actively managed, and notice how relatively high their expenses are. Actually, these ratios are below the category average, but indexing is always cheaper than active management.
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