Catherine Yoshimoto
- Mid-cap stocks balance growth and stability, outperforming small caps in diversification and large caps in agility.
- Russell Midcap valuations remain attractive, with lower international exposure than large caps, making them appealing for US-focused investors.
- The Russell methodology ensures accurate market representation, proactively adding IPOs and adjusting to industry trends.
US large-cap stocks have grabbed the business headlines for years, while small caps have always had a loyal investor following. But what about the middle of the US stock market’s capitalisation spectrum?
In an October 2024 FTSE Russell insight we looked at the opportunities offered by the Russell Midcap index, FTSE Russell’s flagship benchmark for US mid-cap stocks. In this follow-up insight we focus on the index’s methodology, valuations and growth drivers.
Concerns about large-cap risk
A changing landscape and elevated valuations have left many investors feeling uncertain about the next chapter for US mega-cap stocks. After a prolonged period of outperformance, investors are increasingly concerned about the growth prospects for these super-sized companies. Specifically, they wonder how higher-for-longer interest rates, coupled with substantial artificial intelligence (AI) spending, may hinder future returns.
High levels of index concentration also remain a prominent focus for investors: the “Magnificent Seven” tech giants carried a combined weight of nearly 19% in the FTSE Global All-Cap Index as of December 31, 2024. Looking at concentration another way, the effective number of stocks moving the US stock market around is at a historic low.
To counter concentration concerns, a growing number of investors are reallocating funds towards equal-weighted indices and other more diversified index approaches. But many are also taking a step down the capitalisation spectrum to consider mid cap stocks.
Why US mid-caps?
Mid-cap companies offer a compelling blend of stability and growth. These companies—which often fly under the radar of Wall Street analysts and investors—are in a “sweet spot” between their smaller and larger counterparts.
Compared to large- and mega-cap firms, mid-cap companies are generally nimbler and have higher potential growth rates as they move through the steepest part of the business lifecycle. Compared to smaller firms, mid-cap businesses usually offer greater diversification of operations and stronger balance sheets, which can help reduce financial volatility in down markets.
To add depth to our discussion of mid-caps, below we examine valuation trends and relative levels of exposure to domestic (US-generated) revenues. We first outline our index construction methodology and the key characteristics of the Russell Midcap index.
A transparent, modular approach: Russell US Indexes
In 1984, Russell Investments introduced the Russell US Indexes, the first benchmarks to provide an accurate, objective representation of the US equity market opportunity set. The indexes used a revolutionary, modular approach to ensure investors could target large-cap (Russell 1000) and small-cap (Russell 2000) segments separately or in combination.
This modular approach was extended in 1991 when Russell added a specialist mid-cap index to the line-up. We did so by dividing the Russell 1000 Index into the Russell Midcap and Russell Top 200 indexes, with the latter representing the mega-cap segment of the US stock market.
Key characteristics of the Russell Mid-cap Index
While it may be less widely known than the Russell 1000 or 2000 indexes, the Russell Midcap index is nearly as popular as the small-cap Russell 2000 when it comes to assets benchmarked: $1.7 trillion in assets were benchmarked to the Russell Midcap at the end of 2023.
assets benchmarked
Approximately $10.6 trillion is benchmarked to the Russell Indexes
Source: Data as of December 31, 2023, as reported on April 1, 2024 by e3Vestment for active institutional funds, Morningstar for active retails funds, insurance, and ETFs, and passive assets directly collected by FTSE Russell.
Comprising roughly 800 stocks, the Russell Midcap index represents around 21% of the broad Russell 3000 Index by market capitalisation. On average, companies in the Russell Midcap index are significantly smaller than those in the Russell Top 200: the average market cap of $29 billion of stocks in the Russell Midcap compares with nearly $1.3 trillion for the Russell Top 200.
However, while US mid-cap companies are a lot smaller than US mega caps, it’s worth noting that these middle-tier US firms are quite large when viewed through a global lens. This reflects the incredible recent outperformance of the US stock market when measured against its peers.
russell us indexes stock coverage and characteristics
Source: FTSE Russell, data as of December 31, 2024. (% market cap of Russell 3 000 Index).
Historically, US mid-cap stocks have allowed investors to diversify the equity portions of their portfolios, with the variation in industry weights a key driver of this opportunity: while the Russell Top 200 Index is currently heavily concentrated in the Technology industry, the Russell Midcap Index is more balanced, offering greater exposure to important drivers of the US economy, such as Industrials, Financials, Real Estate and Utilities.
icb industry weights (%)
Source: Source: FTSE Russell, data as of January 31, 2025.
Similarly, we see notable industry differences between the top 10 holdings of the Russell Top 200 Index and those of the Russell Midcap Index.
top 10 holdings by weight
Source: Source: FTSE Russell, data as of January 31, 2025.
Russell US Indexes are regularly and proactively maintained to reflect the true US equity market opportunity set. In addition to the annual reconstitution—which will move to a semi-annual frequency in 2026—Russell adds eligible IPOs on a quarterly basis.
This timely inclusion of newly eligible companies means stocks may get added to Russell indexes earlier in their growth phases. Amazon.com, for example, was added to the Russell 2000 Index in the year of its initial public offering (1997), before it graduated to the Russell Midcap index in the following year. Other stocks, including Tesla and Palo Alto Networks, were added to the Russell Midcap Index within one quarter of their listing dates. This illustrates the difference that index methodology can make in adding new companies to the opportunity set for equity portfolios—a key point of differentiation that has helped drive the popularity of the Russell US Indexes.
Russell Midcap Index
Time between IPO month and index addition
Source: Source: FTSE Russell, data as of February, 2025.
Mid-caps present compelling relative valuations
Measured by forecast price/earnings ratios, the Russell Top 200 has become increasingly expensive in recent years, while mid-cap valuations have stayed relatively stable, creating a valuation differential that market participants may find compelling.
Price/Earnings - I/B/E/S 1-Year Forecast
Source: FTSE Russell, data as of January 31, 2025.
Mid-caps offer greater exposure to US-driven revenues
The US remains a comparatively strong market in terms of growth prospects. For investors who wish to emphasize exposure to growth opportunities in the US, moving down the capitalisation spectrum may be an appealing shift: as of December 31, 2024 and using the latest available annual fiscal year end revenue for each stock, companies in the Russell Midcap Index had generated just 24% of revenues outside of the US, while the non-US revenues of companies in the Russell Top 200 index were substantially higher (44%).
real gdp
Source: World Bank, as of January 2025.
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