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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

S&P Mid-Cap 400 Index

What it is:

The S&P Mid-Cap 400 Index tracks a diverse basket of medium-sized U.S. firms. A mid-cap stock is broadly defined as a company with a market capitalization ranging from about $2 billion to $10 billion.

The S&P 400 is not to be confused with the S&P 500, which is composed of large-cap stocks.

How it works (Example):

This index consists of 400 equities. The stocks are chosen based on market capitalization, liquidity and industry representation. The index contains firms that are situated in size between the S&P 500 Index and the S&P Small-Cap 600 Index. It is a market-weighted index, meaning that larger firms have more influence on the index's performance than smaller ones. The average size of a firm in this index is between $1-4 billion. When taken together, the 400 components of the S&P Mid-Cap 400 Index represent about 7% of the total market value of U.S. equities. 

Why it Matters:

The S&P Mid-Cap 400 Index has historically outperformed its larger sibling, the widely quoted S&P 500. This is due to the fact that smaller firms generally outperform their larger rivals over time. Why is this the case? Well, companies often find it harder and harder to boost revenues and earnings at a fast clip as they grow and mature. Because of this, larger firms tend to grow at a slower pace than their smaller rivals.

Although it has grown in popularity in recent years, the S&P 400 remains largely overshadowed by the S&P 500. Meanwhile, investors who wish to invest in smaller firms usually choose the Russell 2000 or the S&P 600. The S&P Mid-Cap 400 Index is stuck in the middle of the market and is primarily used by fund managers. Because of this lack of visibility, the index is not as liquid as its large-cap peers.

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