Understanding the S&P MidCap 400 Index: Key Features, Benefits, and Drawbacks

What Is the S&P MidCap 400 Index?

The S&P MidCap 400 is a benchmark index published by Standard & Poor's (S&P). The index comprises 400 companies that broadly represent companies with midrange market capitalization.

The S&P MidCap 400 was launched in 1991. It is one of several leading indexes issued by S&P that investors use as a gauge for market performance and directional trends in U.S. stocks, especially those who seek growth potential.

How the S&P MidCap 400 Index Operates

The S&P MidCap 400 Index tracks the performance of companies in the mid-range of market capitalization. This distinction sets them apart from large-cap companies. To be eligible, companies must:

• Be U.S.-based
• Have a minimum investable weight factor of 0.10
• Be listed on an exchange

All exchange-traded equities qualify to be listed on the index, including real estate investment trusts (REITs). Closed-end funds cannot be included, such as American depositary receipts (ADRs) and exchange-traded funds (ETFs).

The index is market-cap weighted, so larger companies have more influence on its performance. The formula for weighting each company in the index is calculated by taking the market cap for the individual company and dividing it by the total of all 400 company market caps in the index. This gives larger companies more impact on the index's movements.

The S&P 400 MidCap Index is calculated and rebalanced every quarter in March, June, September, and December. Calculation occurs in real-time in the U.S. dollar (USD), the Canadian dollar (CAD), the euro, the British pound sterling (GBP), and the Japanese yen (JPY).

As of September 2024, the top five sectors as of this date were industrials (22.0%), financials (17.0%), consumer discretionary (14.6%), health care (10.0%), and information technology (8.8%). The top five holdings as of that date were:

• Illumina Inc (ILMN, health care)
• Carlisle Cos (CSL, industrials)
• Lennox International Inc (LII, industrials)
• Emcor Group Inc (EME, industrials)
• Avantor, Inc (AVTR, health care)

Comparing the S&P MidCap 400 and S&P 500 Indices

The S&P 500 is another Standard & Poor's index that was launched in 1997. It is a market-capitalization-weighted index comprised of 500 of the largest companies in the United States. As such, it is considered the best gauge of the U.S. large-cap market. Like the S&P MidCap 400 Index, it is rebalanced every quarter.

As of September 2024, the top five sectors as of this date were information technology (31.0%), financials (13.3%), health care (12.2%), consumer discretionary (9.7%), and communication services (8.8%). The top five companies listed on the index on Sept. 1, 2024, were:

• Apple (information technology)
• Microsoft (information technology)
• Nvidia Corp (information technology
• Amazon (consumer discretionary)
• Meta (communications services)

As of Sept. 1, 2024, the S&P 400 MidCap Index had a year-to-date return of 11.14%. On a one-year basis, the index returned 16.86% and 7.95% on a 10-year basis. This is compared to the performance of the S&P 500, which returned 18.42%, 25.31%, and 10.92% on a YTD, one-year, and 10-year basis.

Breakdown of the S&P MidCap 400 Index Components

S&P describes the selection methodology of the S&P MidCap 400 Index simply as being at the discretion of the selection committee with an attempt to represent the major Global Industry Classification Standard (GICS).

As a capitalization-weighted index, the stocks with the largest market capitalization have the most impact on the index's movement while smaller companies with smaller movements do not affect it. This is for investors who want to diversify their portfolios because market-cap weighted index funds expose investors to the movements of a small group of stocks, despite the broad name of the index itself.

The index only uses free-floating or publicly traded shares. The S&P adjusts each company's market cap to compensate for new share issues or mergers. The index value is calculated by adding the adjusted market caps of each company and dividing the result by a divisor. This divisor is proprietary information of the S&P and is not released to the public.

We can calculate a company's weighting in the index, which can provide investors with valuable information. If a stock rises or falls, we can gauge whether it will impact the overall index. This means a company with a 10% weighting will have a greater impact on the value of the index than a company with a 2% weighting.

Investing in the S&P MidCap 400 Index: A Guide

Investors can benefit from the S&P MidCap 400 Index returns through index investing. This is a passive investment style that allows investors to invest in securities that track the index to mimic its returns. These include securities like ETFs and mutual funds. The following are just two examples of funds that track this index.

The iShares Core S&P Mid-Cap ETF was launched in May 2000 and trades on the NYSE Arca under the ticker symbol IJH. As of September 1, 2024, the fund had $89.7 billion in assets across 406 companies. The top five sectors were industrials (21.89%), financials (16.91%), consumer discretionary (14.57%), health care (9.94%), and information technology (8.80%). The fund's top five holdings were:

• Illumina Inc
• Carlisle Companies Inc
• Lennox International Inc
• Emcor Group Inc
• Avantor Inc

The BNY Mellon Midcap Index Fund was launched in June 1991. It requires a minimum of $2,500 to invest in the fund. As of Sept. 1, 2024, the fund has total fund assets of $1.59 billion across 402 holdings. The top sectors were finance (19.20%), industrials (16.84%), health care (8.73%), technology (8.51%), and retailing (6.35%). The fund's five holdings were:

• Williams-Sonoma
• Carlisle Companies
• Illumina
• Lennox International
• Pure Storage (Class A)

Pros and Cons of Investing in the S&P MidCap 400 Index

Advantages

Mid-cap stocks provide investors with a steady stream of growth. Unlike small-cap companies, mid-cap companies are more stable and are prone to less volatility when it comes to their share prices.

An index like the S&P MidCap 400 gives investors access to a more diverse base of securities. That's because there's a wide range of sectors represented on the index and many more stocks. Therefore, it can help cut down on an investor's market risk.

Unlike large-cap companies, there is usually potential for more growth when it comes to mid-cap companies. Although they're generally very established businesses, companies that fit into this category tend to have more growth in their horizons as they make their way toward becoming larger companies.

Disadvantages

Like any other investment, there's no guarantee in investing in an index like the S&P MidCap 400. It has the potential for the loss of an investor's principal. Mid-caps aren't immune to losses in value, so investors need to be aware that the potential for growth and diversity doesn't necessarily mean big returns.

Some funds that track the index may come with high management fees and higher initial entry points. Although you may be able to track the success of the index, keep in mind that many funds that try to mimic its returns will require a fee payable to the fund manager or firm. The initial minimum investment for some funds may also prove difficult for some investors.

Mid-cap companies are also prone to price risk. That's because they're more volatile than large companies, which generally have steady revenue streams as a result of a trusted, long-standing business.

The Bottom Line

The S&P 400, also known as the S&P MidCap 400, is a stock market index that tracks the performance of 400 mid-sized U.S. companies representing various industries. It provides a benchmark for the mid-cap segment of the market, offering a balance of growth potential and stability between the larger companies of the S&P 500 and smaller firms in the S&P 600. ETFs and mutual funds track the index.

Benefits of investing in mid-caps include growth potential and a more stable investment compared to small-cap stocks, while still being more dynamic than large-caps. But there are some risks: potential principal loss and exposure to volatility.