When building portfolios, I'm a big believer in complete coverage of equity with regard to company size (market cap), style (growth & value), and geography. There are certain investment types I believe you can do without, including commodities, but I believe that stocks should get comprehensive coverage. Equity is a great investment and research shows that there is some diversification benefit in market cap, style, and geography.
In my first posts, I reviewed four different mutual funds:
Dimensional US Micro Cap
PIMCO High Income Fund
American Funds New World
If I take those four funds and analyze the results using portfolio software, I find that the returns are good, but the portfolio has a big hole in the middle: very few midcap stocks are in the portfolio.
iShares Core S&P Midcap ETF fills that gap very well. The fund is one of the cheapest in its category and invests strictly in mid-sized US corporations. Blackrock is the company behind iShares, and is the largest asset manager in the world, so we can have confidence that this fund will be around for many years.
Midcap stocks tend to be worth between 2 billion and 10 billion dollars. They are corporations that have not reached a massive valuation, but are farther along than the small caps.
Since January of 2001, this fund has outperformed the S&P 500 (large cap stocks) by about 3% per year with about the same volatility. Will that continue? It may or may not in the short-term, but in the long-term midcaps will probably do a little better than large caps due to the smaller market cap. Study after study has shown that over long periods of time small company stocks outperform large companies.
Remember to review your risk capacity and preferences before you buy any kind of investment.