Where SMID-Caps Get Their Performance Muscle

SMID-cap stocks, which bridge small- and mid-cap indices, have performed almost as powerfully as small-caps historically, but haven’t been as erratic. The “mid” in SMID is largely why.

The 500 mid-cap companies in the Russell 2500 Index (the most commonly used proxy for the SMID category) make up only 20% of the index’s stocks but 56% of its capitalization. As the display below shows, this subset brings significant improvement in profitability versus the small-cap Russell 2000 Index, while maintaining an earnings growth profile that is only slightly less robust. This fundamentally more resilient and less volatile collection of stocks not only improves the index’s liquidity significantly, but also drives a lot of its performance attractiveness.

Think of these subset companies as the more life-tested members of the small-cap world. They are often as entrepreneurial and niche market–focused as smaller companies, but they are more established and benefit from greater economies of scale. Thus, this cohort is more profitable than its smaller-cap counterparts and, as our research found, enjoys considerably higher returns on investment across most sectors of the economy. Although long-term earnings growth forecasts for the Russell 2500 subset trail those of their smaller peers, they have done a far better job of living up to expectations, as evidenced by their higher reported earnings growth. 

Yet these subset companies can have very different backstories. They can be early-stage, high-growth stars that have graduated from the crowded ranks of small- and micro-cap businesses. Others may be just starting to harvest the profits from their earlier business investments. Or they may be larger-cap firms that have been demoted to mid-cap status because of a controversy that has raised doubts about their earnings power.

Regardless of where they sit on the style spectrum, smaller-cap companies are under-followed and overlooked generally, creating ample alpha opportunities, especially for investors who take the time to know and understand them. And because SMID-caps are more liquid and less volatile than small-caps, trading in a SMID portfolio is more efficient and less costly, so less performance is lost to portfolio implementation. We’ll share more of our research on this topic in more detail in our next blog post on the SMID alpha potential.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio- management teams.

Bruce K. Aronow, CFA

Chief Investment Officer—US Small/SMID Cap Growth
Bruce K. Aronow is Chief Investment Officer for US Small/SMID Cap Growth products, a role he has held since 2000. He is also responsible for the US Small/SMID Cap Growth consumer/commercial services sector. Prior to joining the firm in 1999, Aronow was responsible for research and portfolio management for the small-cap consumer and autos/transportation sectors at Invesco (NY) (formerly Chancellor Capital Management). He joined Chancellor in 1994 as a small-cap analyst, primarily focusing on autos/transportation, specialty finance and consumer-related companies. Previously, Aronow was a senior associate with Kidder, Peabody & Co. for five years. He holds a BA with a concentration in philosophy and a minor in economics from Colgate University and served as a recent graduate member on the Board of Trustees of Colgate University from 1990 to 1993. Aronow is a member of both the New York Society of Security Analysts and the Association for Investment Management & Research (AIMR), and is a CFA charterholder. Location: New York

James MacGregor, CFA

Chief Investment Officer—Small and Mid-Cap Value Equities
James MacGregor was appointed Chief Investment Officer of Small and Mid-Cap Value Equities in 2009. From 2009 to 2012, he also served as CIO of Canadian Value Equities. From 2004 to 2009, MacGregor was director of research of Small and Mid-Cap Value Equities, overseeing coverage of companies for the Small-Cap and Small/Mid-Cap Value services. He started as a research analyst covering the banking, energy, industrial commodity, transportation, and aerospace & defense industries for those same services. Prior to joining the firm in 1998, MacGregor was a sell-side research analyst at Morgan Stanley, where he covered US packaging and Canadian paper stocks. He holds a BA in economics from McGill University, an MSc in economics from the London School of Economics and an MBA from the University of Chicago. MacGregor is a CFA charterholder. Location: New York

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