(PUB) Investing 2016

Growth (POGRX), the alternative for those closed out of PRIMECAP, returned 4.3% over the past year. I’ll have a full description of the strategy and its performance history in next month’s issue. >

ly 3,300 stocks, this sprawling port- folio is really a smid-cap (small-cap plus mid-cap) index that Vanguard has lumped in with purer mid-cap funds. Despite offering exposure to both small and mid-cap stocks, Extended Market Index’s annual gain of 7.2% over the past 10 years trails both MidCap Index and SmallCap Index ’s 7.3% pace. And MidCap Index has out- performed by just over 2% per annum since its inception. For my money, I want to control how much I have invested in large-caps ver- sus mid- and small-caps. Well, you can do that with various Vanguard index funds, and for mid-caps, MidCap Index is a better choice. And if you are an index purist, you are probably looking for the one-and-done option of Total in the first quarter of 2017. So, don’t be surprised when you see new names early next year. We’ll try to get every- thing changed in our files, but if we miss a name change, please don’t hold it against us. We’ll get them fixed. n

in this often-overlooked part of the mar- ket, the rewards are meaningful extra returns without significantly more risk. With that said, let’s turn toVanguard’s mid-cap index options and then its actively-managed ones for specific rec- ommendations. Extended Market Index Sell. Extended Market Index is a vestige of the days when Vanguard was looking for a “completion” index to com- bine with 500 Index as a means of index- ing the entire U.S. stock market. I strug- gle to see where this fund fits in today. If you want to own the entire U.S. stock market, why not just hold Total Stock Market and be done with it? And if you want mid-cap stocks, then just buy a mid-cap index. Holding near- And finally, in case you missed it, Vanguard is changing the name on several “tax-free” funds to “munici- pal” in the wake of the money market reforms that took effect in October. The change goes into effect sometime

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However, the Russell MidCap index outpaced both those indexes by over 2% per annum—an advantage that com- pounds to significant gains over time. One hundred dollars invested in the Russell MidCap index at the end of 1978 would have grown to $11,152 by the end of September 2016. That’s more than double the return for large-cap stocks, which would have grown to just $5,446. And it’s over 70% greater than the $6,491 gain you’d have earned from small-caps. Check out the rolling return stats in the table as well. Mid-caps’ per- formance edge was not the result of one outstanding period, as these stocks held their advantage on average over rolling three- and five-year time periods as well. What about the risk side of the equation? Well, as you can see in the table, the Russell MidCap index hasn’t been any more anxiety-producing to hold than its large- or small-cap sib- lings. Yes, its steepest decline, a loss of 54.2% reached during the financial crisis of 2008–2009, was deeper than that experienced by small- and large- cap stocks, but not by much. And if we exclude the financial crisis, mid-cap stocks have actually produced smaller drawdowns. Or consider that the worst five-year stretch for mid-cap stocks was better than the worst five-year period for large- or small-cap stocks. To what can we attribute the success of these middle children? Mid-sized companies combine the growth char- acteristics of small companies with the financial stability of large ones, yet they still fly under the radar of many analysts who are focused only on the biggest companies in the marketplace. This doesn’t mean mid-cap stocks will outperform year in and year out—noth- ing in the investment world is so reli- able—but for investors willing to invest

Many Ways to Index Mid-Cap Stocks Extended Market Index

MidCap Growth Index

S&P MidCap 400 Growth ETF

Number of Stocks

3274 34.4 $3.7 0.3% 0.0% 2.4

157 33.9

226 26.9

P/E

P/Book

4.7

3.6

Median Mkt. Cap. (billions)

$12.8 0.0% 0.0% 13.5% 10.5% 5.1% 14.9% 12.2% 23.6% 17.8% 0.4%

$5.2 0.0% 0.0%

Foreign

Cash

Sector Allocation Consumer Discretionary

14.1% 3.5% 4.1% 15.8% 11.9% 12.8% 18.0% 5.2% 10.0% 1.2% 3.4%

12.7% 5.6% 0.0% 13.7% 13.8% 10.2% 22.6% 5.5% 14.2% 0.0% 1.7%

Consumer Staples

Energy

Financials Health Care Industrials Materials Real Estate

Information Technology

not reported

Telecommunication

2.0% 0.0%

Utilities

Top 10

5%

14%

12%

1 2 3 4 5 6 7 8 9

Liberty Global Tesla Motors

Ross Stores

IDEXX Laboratories WhiteWave Foods

Edwards Lifesciences

LinkedIn

Equinix

ResMed

Las Vegas Sands FleetCor Technologies

Electronic Arts

CDK Global

Fiserv

Regency Centers

Incyte

Amphenol

ANSYS

BioMarin Pharmaceutical Palo Alto Networks SBA Communications

Concho Resources

Broadridge Financial Sol.

Cerner

MSCI

Roper Technologies

Packaging of America Cadence Design Systems

10

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