Is there a mid-cap equity sweet spot? Take a fundamental look at the S&P MidCap 400, including key performance drivers, sector and revenue exposures, as well as a new sustainability screened index built on the S&P 400 with State Street Investment Management’s Ryan Reardon and S&P DJI’s Hamish Preston.
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Jenny Ellice:
Is there a mid-cap equity sweet spot? Often overlooked in favor of other size ranges and investment practice in academic literature, mid-cap stocks have distinct characteristics that may be useful to market participants seeking to diversify sector, size and factor exposures.
Well, I’m Jenny Ellice from Asset TV. I’m joined today by Hamish Preston of S&P Dow Jones Indices and Ryan Reardon of State Street Investment Management for a fundamental look at U.S. mid-cap equities and to look under the hood of the S&P MidCap 400 Scored & Screened Leaders Index.
Hamish, Ryan, good to have you with us today.
Hamish Preston:
Great to be here.
Jenny Ellice:
So, Hamish, I’m going to come to you first, and how does S&P Dow Jones Indices define mid-cap equities, and how have they performed historically?
Hamish Preston:
Sure. So, S&P Dow Jones Indices’ preeminent U.S. mid-cap equity index is the S&P MidCap; 400®. Now, this 400-company index uses various criteria that new index editions have to meet before they can be considered eligible for the index. And, one of those screens is a size threshold. So, at the time of recording, new index editions need to have a market capitalization of between USD 8 billion up to USD 22.7 billion. Now, these thresholds are reviewed regularly and have been updated throughout history.
Now, if you take a step back, what’s potentially interesting about the mid-cap U.S. equity space is that the breadth and depth of the U.S. equity markets means that the mid-cap space is as large as entire countries’ equity markets. So, if you treated the S&P 400 as a stand-alone country, it would be one of the largest equity markets in the world.
Coupled with its distinct exposures compared to the S&P 500®, from a sector perspective, and also a revenue exposure perspective, the S&P 400 is typically more domestically focused and, as a result, has been more correlated to U.S. GDP growth. That, potentially, is relevant for people looking to express views on the health of the U.S. economy, for instance.
And, finally, just from a performance perspective, since the 1990s, the S&P 400 has outperformed both the S&P 500 and the S&P SmallCap 600®. And, it’s been the choice of constituents rather than differences in sector weights that have typically driven that outperformance. And, so, what that really points to is mid caps potentially being in a sweet spot of the business cycle, maybe overcoming some of the hurdles more commonly associated with small caps, but perhaps with room to grow compared to their large-cap counterparts.
Jenny Ellice:
And, Ryan, how have mid-cap equities historically been used, and what are some of the potential applications in this current landscape?
Ryan Reardon:
Yes, it’s actually really interesting. I think the S&P 500 is such a well-known and recognizable index that it’s more or less synonymous with the U.S. equity space. And, everybody is familiar with small-cap, smaller companies. But, in a market like the U.S. market, there’s this huge mid-cap segment that Hamish is talking about.
And, when you move down the market-cap spectrum, the first thing you’ll notice is that the smaller the company is, the more locally focused it is. And, so, as an example, mid- and small-cap U.S. stocks are typically about 80/20, 80% domestic revenue, 20% international revenue. At the mega cap, S&P 500, that can go up to 50/50, or, even, 60/40. So, the first thing you notice is that mid caps are a pure play on the domestic market, the U.S. consumer, as Hamish highlighted. So, a lot of our clients are seeing strategic opportunities there to reflect a view in their portfolio that is more tied to the relative strength of the U.S. economy.
But, then, also tactically, there are headlines around global trade disruptions and issues related to tariffs. When you’re more domestically focused, in theory, you’re less dependent upon those sorts of areas and more, it’s about, what is the employment situation, what is the relative strength of that economy? And, so, we’ve seen a lot of money pour into U.S. small-cap and mid-cap stocks as a sort of diversification play away from the areas that have been working within the S&P 500, like the Magnificent 7.
Jenny Ellice:
And, how does sustainability apply to mid caps?
Ryan Reardon:
Sustainability is very interesting. It applies to most of our investors’ and clients’ portfolios. So, we noticed this when, about five years ago, we provided a S&P 500 Scored & Screened option for investors. The numbers on that are about 1 to 6, so about USD 1 of every USD 6 opts to go into a sustainable-focused core equity exposure.
So, overwhelmingly, investors prefer the traditional S&P 500 exposure. And, so, with respect to mid caps, S&P 400, we’ve seen about USD 2 billion go into the S&P 400 exposures in the last one year. And, we thought, we are going to have a large client base that’s going to want an Article 8 sustainable option to go along with this. So, for us, it’s about providing optionality to the investors. And, so, it’s not about the S&P 400 or S&P 400 Scored & Screened Index. It’s about providing both options to investors so that you can play that U.S. mid-cap theme through, either, the sustainable lens, or the traditional lens.
Jenny Ellice:
And, Hamish, finally, can you tell me more about the S&P MidCap 400 Scored & Screened Leaders Index, and what makes it unique?
Hamish Preston:
Sure. So, the index was launched in April 2025, and it uses the S&P 400 as a starting universe. And, it looks to measure the performance of those companies from the S&P 400 that have above-average S&P Global Environmental, Social and Governance, or ESG, Scores, and while excluding companies that derive revenues from certain business activities or are not compliant with the United Nations Global Compact (UNGC).
Now, the index design itself looks to retain certain characteristics of the S&P 400, for example, industry group weights. So, although index performance is not specifically mentioned in the S&P 400 Scored & Screened Leaders Index objective, that similarity of industry group weights has contributed to a similarity of index performance compared to the S&P 400 historically.
Coupled with the improvement in the S&P Global ESG Score of the S&P 400 Scored & Screened Leaders Index compared to the S&P 400, what it means is that this index may be relevant for people looking to incorporate sustainability perspectives while retaining certain characteristics of the flagship U.S. equity mid-cap index.
Jenny Ellice:
Well, clearly, lots of reasons to consider U.S. mid caps there. Well, Hamish, Ryan, thanks so much for joining us.
Hamish Preston:
Thank you.
Ryan Reardon:
Thank you.
Jenny Ellice:
Well, to learn more about the S&P MidCap 400 and the S&P MidCap 400 Scored & Screened Leaders Index, including S&P Dow Jones Indices’ latest research and data, visit the link below.
