For investors seeking a unique blend of resilience and growth opportunity, mid-cap investing can be an intriguing choice. These securities are viewed as big and safe compared to the highly volatile small-cap exposure. But when compared to the stability of large caps, these are relatively risky bets. However, investors ignoring this key segment of the investing spectrum should note that many mid-cap ETFs have been hovering around a month-high level.
What’s Acting Against Large Caps?
The global market, though steady after a slew of trade deals between the United States and other nations, still faces President Trump’s tariff tensions. U.S. President Donald Trump's new global tariffs have come into effect at 10% But there was a pledge to introduce them at a higher rate, per BBC.
IMF projects global growth at 3.3% for 2026 and 3.2% for 2027. The growth rate was 3.3% in 2024 to 3.2% in 2025. We can see there is no material improvement in the growth rate trajectory. Any slowdown in foreign economies might make some investors cautious about large-cap stocks because of their higher foreign exposure.
What’s Favoring Smaller-Cap Stocks?
The Fed has enacted three rate cuts totaling three-quarters of a percentage point in 2025. Agreed, the Fed’s outlook for 2026 looks more controlled now. The Fed held its benchmark interest rate in a range of 3.5% to 3.75% at the January meeting. The market expects very low chance (3.9%) of the Fed choosing to cut at its March meeting, but J.P. Morgan still expect one rate cut in 2026.
The Fed now projects real GDP to be 2.3% in 2026 (up from 1.8% predicted in September), 2% in 2027 (up from 1.9% projected in September) and 1.9% in 2028 (up from the earlier estimate of 1.8%). Since small-cap stocks have more domestic exposure, these projected data points call for a pint-sized stock rally.
Unemployment rate projections are maintained for 2026 at 4.4% while the rate is projected to decline by one percentage point to 4.2% in 2027. The PCE inflation is projected to be 2.5% (down from the earlier estimate of 2.6%). This scenario should also favor the domestically-focused stocks like small caps and mid-caps.
But then, with tariff-led inflation fears doing the rounds and the labor market still not on the strong footing, small-cap stocks may see high volatility. So, it is better to consider more stable companies’ stocks than the pint-sized ones.
Reasons for Mid-Cap Investing
All in all, the situation is not entirely favorable for small or large caps. Thus, it is advisable to take a middle-of-the-road approach and gain exposure to a space that offers the best of both worlds. In this regard, we highlight a few mid-cap ETFs that have surged over the past month and may do so in the coming days. These ETFs have beaten SPDR S&P 500 ETF Trust SPY (down 0.9%) over the past month.
Mid-Cap ETFs in Focus
WisdomTree US MidCap Quality Growth Fund QMID – Up 2% over the past month
State Street SPDR S&P 400 Mid Cap Value ETF BBMC – Up 3% over the past month
Janus Henderson Mid Cap Growth Alpha ETF JMID – Up 1.7% over the past month
Invesco S&P MidCap Low Volatility ETF XMLV – Up 1.5% over the past month
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State Street SPDR S&P 500 ETF Trust (SPY): ETF Research Reports Invesco S&P MidCap Low Volatility ETF (XMLV): ETF Research Reports JPMorgan BetaBuilders U.S. Mid Cap Equity ETF (BBMC): ETF Research Reports WisdomTree U.S. MidCap Quality Growth Fund (QMID): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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