Many have said that midcap stocks are a “sweet spot” of market capitalization. They deliver both growth potential — typically associated with smaller companies — and profitability — usually seen in larger companies. To quote WisdomTree, in a recent research note, midcaps sit in the “sweet spot between innovation and maturity.”
As the firm puts it, “They’ve graduated from the start-up phase, proven profitability and often trade at more reasonable valuations than their large-cap peers, while still delivering stronger earnings growth than small caps.”
Sounds pretty sweet, indeed. And yet, midcaps have had a tough year in 2025. They remain an overlooked and under-loved part of the market.
According to Kirk McDonald, portfolio manager at Argent Capital Management, most investors are underweight midcaps relative to the market. Today, portfolios average a 11% to 12% allocation to these stocks, his data shows. WisdomTree, too, says advisor conversations reveal an even lower 5% average allocation across equity holdings. Whether 11% or 5%, both stats stand in stark contrast to the midcap opportunity set, which represents about 25% of the market’s overall market capitalization.
“Midcaps are typically strong performers relative to large and small caps, but this year has been different,” McDonald says. “The market’s outperformance has been tied to AI-centric, megacap names. It’s also been a year of tremendous speculation around low quality, low profitability names, mostly small-caps.”
Midcap performances, he says, has fallen behind because they tend to be higher quality, offer stronger balance sheets than smaller caps, and they are often free cash flow positive. The market hasn’t rewarded those traits this year.
But all of that could be about to change.
“The opportunity for midcaps is best right about now,” because they have historically done best relative to peers in rate cutting cycles, he says.
Drivers of Results
In fact, beyond rates, there are a few factors that could support midcaps going forward. Consider three: valuations, the broadening AI theme, and diversification.
Valuations
Midcaps are attractively priced. This category of market capitalization is delivering high quality, growing businesses that are trading, in the aggregate, at significant discounts to larger counterparts.
If we compare the trailing P/E of the Russell midcap Index vs. the S&P 500, we find that midcap stocks are trading at about a 25.5% discount to large-caps. It’s a discount that has been persistently wide in the past couple of years, but remains well above historical averages.
The broadening AI theme
To quote WisdomTree, “AI has become synonymous with large-cap technology growth stories. But its real potential may be in cost containment across traditional industries.”
“Mid-sized companies, with leaner structures and fewer legacy systems, can often integrate new technologies faster, helping offset wage pressures, tariffs and other input costs,” WisdomTree says.
And McDonald agrees. As he sees it, megacaps may steal the show in the AI thematic opportunity. However, midcaps stand out as key suppliers and supporters of a lot of the AI infrastructure being built. And these high-growth business are trading at a discount to boot.
Diversification
Large-cap concentration across key indices remains a big theme, not only at top 10 individual holdings level but also at sector level. A look at the S&P 500 shows that the tech sector alone snags roughly 35% of the portfolio, and only two sectors represent nearly 50% of the index weighting.
The midcap space is more diversified across sectors. The Russell Midcap Index, for example, only has tech representing about 12% of the portfolio. Industrials lead at 18%, followed by financials at 15%. That puts the top three sectors at a combined 45% of the overall mix. Similarly, the S&P 400 has industrials at 22%, financials at 17% and tech at 13%.
ETF Access
There are a number of ways to access midcaps in ETFs.
One of the originals is the SPDR S&P MIDCAP 400 ETF Trust (MDY), which has nearly $24 billion in assets. The fund is among the most liquid in the category, and a trader favorite.
State Street Investment Management is also behind a lower-cost core ETF tracking the same index, the SPDR Portfolio S&P 400 Mid Cap ETF (SPMD), which costs only 3 basis points vs. the 23 basis-point fee associated with MDY.
That lower price tag as well as lower share price — SPMD shares cost about a tenth of MDYs share price — have been compelling attributes, and the fund today has nearly $15 billion in assets. These funds are among a wide lineup of passive market beta offerings from several providers.
There are also actively managed approaches, such as the Argent Mid Cap ETF (AMID), which McDonald and his team run. The fund invests in midcap quality by focusing on “enduring businesses” that are growing cash flows, have strong management, and durable competitive advantages. AMID is a punchy portfolio of 35–50 high-quality, attractively valued stocks handpicked through fundamental analysis and hands-on research.
A focus on quality can also be achieved through moat strategies like the VanEck Morningstar SMID Moat ETF (SMOT), which blends quality and valuation, looking for companies that have a competitive moat.
From factors, sectors and management style differences, there are many ETF strategies for investors looking to access midcaps. There’s even values-based smart beta approaches, like the Timothy Plan US Large/Mid Cap Core ETF (TPLC), which filters security selection for Biblical values, and employs a volatility weighting scheme for a smoother ride over time.
As McDonald puts it, longer-term, this slice of market capitalization tends to outperform its peers. It delivers a mix of growing businesses that are largely profitable, high quality, and attractively priced. With lower rates and supportive macro conditions ahead, midcaps could deliver value.
Check out our list of midcap ETFs to learn more about ETFs in this category.
For more news, information, and analysis visit the Thematic Investing Content Hub.
VettaFi LLC (“VettaFi”) is the index provider for TPLC, for which it receives an index licensing fee. However, TPLC is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of TPLC.
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