After more than a decade dominated by megacap technology stocks, U.S. small- and mid‑cap equities (SMIDs) are reemerging as a compelling — and underutilized — opportunity for investors seeking growth, diversification, and attractive valuations.
Our analysis suggests that combining small and mid caps into a single, actively managed allocation offers flexibility to capture companies as they grow and potentially reduces the risks of investing solely within the smallest segment of the market.
For instance, mid-cap stocks — the MID in SMIDs — are often overlooked, yet they have historically delivered risk-adjusted returns comparable to and at times exceeding large caps. They can also help fill an allocation gap created by the common barbell approach of combining large- and small-cap strategies.
Incorporating SMIDs is also an important consideration for defined contribution plans.
Capital Group’s multi-asset solutions team found that adding SMIDs to certain target date vintage portfolios provided the potential for enhanced growth and diversification, and a broader opportunity set than large caps alone, while mitigating the extreme volatility of pure small caps.
In other words, a blended SMID allocation can serve as a moderate risk equity exposure — filling the space between conservative large caps and high-octane small caps. We examine this gap directly and argue why this segment deserves renewed attention.
