FTSE Russell Insights

Opportunities in the middle: the Russell Midcap Index

Catherine Yoshimoto

Director, Product Management, Benchmark Product Development

As index concentration and the prominence of mega cap companies remain central themes, investors are focused on diversifying their US equity portfolios with an eye toward balancing risk and return.

  • Balanced Growth and Stability: Mid cap stocks offer the agility of small caps with the financial strength of large caps, making them a powerful diversification tool.
  • Undervalued Opportunities: With less analyst coverage than mega caps, mid cap stocks often operate autonomously and have more room for organic growth and acquisitions.
  • Russell Midcap Performance: The Russell Midcap Index outperforms the Russell 2000 Index with lower risk, providing an optimal blend of growth and reduced volatility.

Investors have long embraced equity diversification across market capitalization ranges, traditionally segmenting the universe into large cap and small cap. In more recent years, investors have increasingly looked to the mid cap range to capture the benefits of exposure to companies with attributes of both smaller and larger firms. Thanks to their unique characteristics, US mid cap stocks have demonstrated strong performance historically and have emerged as an effective way for investors to further diversify the equity portions of their portfolios.

The appeal of US mid cap stocks

US mid cap stocks have historically received less attention from analysts and investors than well-known mega cap companies, such as Apple, Nvidia, or Eli Lilly. As a result, mid cap companies may benefit from being able to operate more autonomously, expand through organic growth, and acquire smaller companies over time. 

In addition to the benefits of flying under the radar, middle tier companies are in a “sweet spot” between their smaller and larger counterparts. Compared to 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 offer greater diversification of operations and stronger balance sheets, which can help reduce financial volatility in down markets. 

In short, mid cap firms have a proven history of success yet still enjoy a runway for growth, offering investors a compelling blend of the stability of large caps and the growth opportunities of small caps.

A modular approach: Russell US Indexes

In 1984, Russell Investments introduced the Russell US Indexes, the first indexes to provide an accurate, objective representation of the investable US equity market. The indexes used a revolutionary, modular approach to ensure investors could target large cap (Russell 1000 Index) and small cap (Russell 2000 Index) segments separately or in combination. 

This modular approach was extended in 1991 when Russell added mid cap to its lineup of size indexes by dividing the Russell 1000 Index into the Russell Midcap and Russell Top 200 (mega cap) indexes. Russell Midcap Index’s complete coverage gives investors the opportunity to strategically allocate to, and benefit from, the characteristics of the mid cap space.

Index market cap as % of Russell 3000

This chart displays the Market capitalization breakdown of the Russell 3000.

Source: FTSE Russell, as of September 30, 2024. Please see the end for important legal disclosures.

  Russell Top 200 Index (mega cap) Russell Midcap Index Russell 2000 Index (small cap)
Number of holdings 199 811 1,977
Net market cap $T USD 41 11.7 2.7
Dividend yield 1.18 1.58 1.33
Price/Book 5.75 3.11 2.17
Price/Earnings excluding negative earnings 28.53 21.44 17.82
EPS Growth – 5 years 19.11 13.53 12.83
Average market cap in $B USD ($-wtd) 1161.68 26.7 3.55
Median market cap in $B USD 104.88 11.63 0.99
Largest stock by market cap in $B USD 3597.96 82.84 15.37
Weight in largest 10 holdings 40.40% 5.00% 3.70%

Source: FTSE Russell, as of September 30, 2024. Please see the end for important legal disclosures.

In terms of industry mix (see the bar chart below), the Russell Midcap and Russell 2000 indexes are generally more diversified than the Russell Top 200 Index, which had a weighting of greater than 40% in technology as at end-September 2024. 

In today’s environment, investors may see advantages in the comparatively greater industrials weightings in the Russell Midcap and Russell 2000 indexes, given the global trend towards insourcing and supply chain relocation. Similarly, the mid cap and small cap indexes have heavier weights in utilities, an industry influenced by infrastructure renewal, new energy innovation, and AI energy demands.

When considering the current landscape, it’s also worth noting that the recent start of a rate cut cycle by the Federal Reserve may support smaller companies, which tend to hold a greater share of floating rate loans than fixed rate debt when compared to large and mega cap borrowers. [1] 

Industry Breakdown: Russell Top 200, Midcap, and 2000 Indexes

This chart displays When considering the historical performance of the small cap and mid cap indexes, the Russell Midcap Index has outperformed the Russell 2000 Index over standard periods ended September 30, 2024.

Source: FTSE Russell, data as of September 30, 2024. Please see the end for important legal disclosures.

When considering the historical performance of the small cap and mid cap indexes, the Russell Midcap Index has outperformed the Russell 2000 Index over standard periods ended September 30, 2024. Furthermore, the Russell Midcap Index has provided lower risk (annualized standard deviation) relative to index return than the Russell 2000 Index over the 15 years ended September 30, 2024. 

Index Performance: Russell Top 200, Midcap, and 2000 Indexes

This chart displays the Index Performance: Russell Top 200, Midcap, and 2000 Indexes

Source: FTSE Russell, as of September 30, 2024. Past performance is not a guarantee of future results.  Please see the end for important legal disclosures.

Index Comparison: Russell Top 200, Midcap, and 2000 Indexes

This chart displays the Index 15-year Annualized Risk/Return: Russell Top 200, Midcap, and 2000 Indexes

Source: FTSE Russell, as of September 30, 2024. Past performance is not a guarantee of future results. Please see the end for important legal disclosures.

Russell Midcap Index constituents offer positive growth, stable members

In taking a closer look at the constituents of the Russell Midcap Index, we observe two themes which support the appeal of US mid cap stocks.

First, we see a notable number of companies on a positive growth trajectory. In the 2024 Russell reconstitution, 27 constituents rose through the ranks from the Russell 2000 to join the Russell Midcap Index, with the highest number and weight of graduates coming from the technology industry. 

2024 Top 10 Graduations by Weight from Russell 2000 to Russell Midcap Index

Constituent Name Industry  Russell Midcap Index weight 
Super Micro Computer Inc Technology 0.38%
Microstrategy Inc Technology 0.20%
Carvana Co Consumer Discretionary 0.13%
Elf Beauty Inc Consumer Discretionary 0.10%
Onto Innovation Inc Technology 0.10%
Comfort Systems USA Inc Industrials 0.10%
Chord Energy Corp Energy 0.10%
Permian Resources Corp Energy 0.09%
Light & Wonder Inc Consumer Discretionary 0.09%
Weatherford Intl Plc Energy 0.08%

Source: FTSE Russell, as of July 1, 2024. Please see the end for important legal disclosures.

Second, we see a significant number of stable members and dividend payers in the Russell Midcap Index. Over the 2014 to 2024 period, 333 companies were included at each of the recon events, with the highest weights in the industrials, financials, and consumer discretionary industries. Of note, 126 of these companies were also in the Russell Midcap Dividend Growth Index, which includes stocks paying increasing dividends over 10 years.

Top 10 Stable Constituents in the Russell Midcap Index from 2014-2024 by Weight

Constituent Name Industry Russell Midcap  Index weight Russell Midcap Dividend Growth Index member
Gallagher Arthur J & Co Financials 0.50% Y
Hilton Worldwide Holding Consumer Discretionary 0.50% N
Microchip Technology Technology 0.50% Y
Oneok Inc Energy 0.40% N
Realty Income Corp Real Estate 0.40% Y
United Rentals Inc Industrials 0.40% N
Ameriprise Financial Inc Financials 0.40% Y
D R Horton Inc Consumer Discretionary 0.40% Y
Idexx Labs Inc Health Care 0.40% N
Cheniere Energy Inc Energy 0.40% N

Source: FTSE Russell, as of July 1, 2024. Please see the end for important legal disclosures.

Together, the modular Russell US size indexes give investors the precision and flexibility needed to construct portfolios that provide accurate exposures to their targeted market segments—including the opportunities currently present in mid cap stocks.

 

1. LSEG Workspace, data as of October 2, 2024.  

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