MDY vs SPY: How Mid-Cap outperforms the S&P 500

When it comes to investing in the stock market, almost everyone is familiar with S&P 500 index and its corresponding ETFs and mutual funds. SPDR S&P 500 ETF (SPY) is the largest ETF in the market with around $245 Billion assets under management. Vanguard's VFIAX mutual fund is the second largest fund that tracks S&P 500 with $217 Billion assets under management. So, people are using the index funds and it's great. But is S&P 500 the best long term solution? Jack Bogle, founder of Vanguard group, said in an interview with Wealthtrack that he believes the ETF that everyone should own as a core investment is US Total Stock Market Index (VTI). I put VTI and SPY against each other and VTI came back on top as you can see in the chart below (Courtesy of Yahoo Finance).

As you can see, VTI has outperformed SPY over the last 16 years. So, that is why Jack Bogle believes VTI is a better investment than S&P 500. The reason why VTI has outperformed SPY is that it includes more than 3000 companies, many of which are mid-cap and small-cap. However, because VTI is market cap weighted, it has a high correlation to S&P 500, meaning the largest 500 companies have an impact of around 85% on VTI. "If VTI outperformed SPY with that small additional weight from mid and small caps, isn't it better to go for smaller companies?" was the question I asked myself. Now, let's talk about SPDR S&P Mid-cap 400 ETF (MDY). MDY is the oldest mid-cap ETF in the market (date of inception goes back to 1995) and it has more that $18 Billion assets under management. Let's add MDY to the comparison and see how it has performed against VTI and SPY.

As you can see in the chart (Courtesy of Yahoo Finance), MDY has easily outperformed VTI and SPY over the same 16 year period. This should not surprise you as smaller companies have more room to grow and during strong bull markets, they outperform larger companies. And now take a look at chart below which goes back to 1995 and compares MDY and SPY over a 22 year period.

You can clearly see in the chart (Courtesy of Yahoo Finance) that the longer you go back, the better will be the performance of MDY against SPY. It is worth noting that mid-cap companies are fairly big companies on their own. In fact MDY seeks to provide exposure to companies with a market cap in the range of $1 billion to $4.5 billion. If this trend continues, you can expect mid-caps outperforming large-caps over the next couple of decades. I will be comparing small caps and mid caps in the upcoming blog posts to see if such a trend is noticeable there.

Disclosure: At the time of this publication I am long MDY. This publication is NOT intended as financial advice. Published statements are opinions only.